If you’ve accrued credit card debt, then you should be thinking about how to pay it off. You may know that carrying debt – especially if you’re using a high percentage of your available credit – can negatively impact your credit score.
But what’s the best way to pay off credit card debt? A lot of people don’t know the answer to this question, and it’s one that can have a big impact on your credit score – and your life. We’ve broken it down into five easy steps to help you pay off your credit cards and get back on track financially.
The first step is to know how much you owe. If you haven’t been careful with your credit in the past, this can be a scary thing to do. You’ll have to gather your latest bills, write down the balance for each and add to get your total.
While you’re at it, make note of a few other key bits of information:
This data will help you make decisions about what to do going forward.
The next step is to commit to making your minimum monthly payments each month. If you don’t, you’ll end up paying additional fees and it can hurt your credit score, too.
It might be tempting to skip those monthly payments to pay off one card, but resist that urge. You won’t be doing yourself any favors if you do additional damage to your score.
One of the best ways to ensure you make those monthly payments is to set up automatic payments through your bank or credit union.
Monthly minimum payments are low for a reason. Credit card companies want to earn money, so they encourage you to make regular, low payments so you’ll continue to pay interest on your balance.
Your goal, then, should be to map out a strategy that will minimize the amount of interest you pay on those balances. That can mean different things to different people. Here are some potential strategies to consider:
What you can see here is that there are financial and psychological elements at play. If you think you need to feel that you’ve finished paying something, you might want to choose the second option here and pay off your smallest card quickly.
It’s important to keep in mind that the strategy you choose may impact your credit score. For example, if you know that your credit utilization is high, then paying down the card with the highest utilization can help improve your score.
It might seem counterintuitive, but one option to consider is using a credit card to pay your credit card debt. The best way to do it is to apply for a low-interest card with a low balance transfers APR.
This strategy is ideal if you have a decent credit score and want to save on interest. Applying for one new card won’t have too much of an impact on your FICO score. If you’re approved, you can transfer your balances and simply make payments on the new card.
Of course, the amount you owe will stay the same with this option. But, if you know it’s going to take you a while to pay down your balances, the money you save on interest may make this a worthwhile step to take.
Once you pay off a card, you’ll have to decide whether to keep the account open, or close it. As you may know, there are some advantages to holding on to a long-standing account even if you don’t use it. The length of your credit history accounts for 15% of your FICO score.
If you’ve got a newer card with a high interest rate, the best thing to do may be to close the account. Just make sure that you know what each card is doing for your score before you make the decision.
Paying off credit card debt is a good way to regain control of your finances. Using these five steps can help you do it in a responsible way that gives your credit score a boost.
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