Americans have on average three credit cards per household carrying a combined balance of nearly 12,000 thousand dollars and most are just paying the minimum payment due.
You are already aware that this is taking you deeper into debt and further from debt elimination. In fact, your balances are likely growing on you seemingly moment by moment. Do not give up there is a better way!
Using what is known as the credit card snowball effect you can pay down then pay off all of your credit cards. Currently you are floating along only doing the minimum, this way you take an active role in your debt elimination.
Let's take a closer look at a snowball. You start small and soon after rolling over and over they can build massive. Does that sound a little too familiar with your credit? Apply the credit card snowball effect in the positive way and you'll see it works.
Credit cards grow so fast due to something called compound interest. To put it simply when you only make the minimum payment you likely are not even covering the interest. Now that interest ends up as part of the balance and next month, you will be assessed interest on the new balance. Sound like a credit card snowball?
There are many people who will tell you to pay off the card with the highest interest rate first. This is what that plan will look like:
Write down all your cards.
Rank them in order of interest rate percentage.
Pay as much extra as you can each month on the one with the largest interest rate.
Do this over again for each succeeding credit card until you have eliminated them all.
There seems to be nothing wrong with the above example for debt elimination, and sometimes it is that simple. Nevertheless, situations are not all created equally and there will be times that demand a different solution.
Interest rates will vary from one card to the next. Some will be extremely high and some will have lower introductory rates. All things being equal paying off the highest interest rate would sound reasonable, nevertheless consider the example below.
To put this in terms that make sense consider the interest on your different cards and how your balance affects that number. Say, you have a credit card with a $5,000 balance at 10% interest; this means your monthly interest is fifty dollars. On the other hand, say that the other card has a $2000 balance at 20% interest rate. Your monthly interest would be forty dollars. The higher interest rate is actually cheaper per month.
The above example just goes to show that higher interest is not always the enemy of your debt elimination. The credit card snowball effect will quickly take your balance to new heights. Particularly if you are only making the minimum, payment required.
Let's take another look of how to use the credit card snowball effect to your advantage:
Make a list of all your credit cards.
Rank them according to amount of actual interest you pay each month.
Add extra payments to this card until the balance is zero.
Keep all other cards at minimum to free up cash to pay off the first card.
Repeat this process until all cards are paid off.
Life often has many paths to the same goal. Credit cards and debt elimination are no different. Always consider things from all angles before embarking on your debt elimination process.
You are already aware that this is taking you deeper into debt and further from debt elimination. In fact, your balances are likely growing on you seemingly moment by moment. Do not give up there is a better way!
Using what is known as the credit card snowball effect you can pay down then pay off all of your credit cards. Currently you are floating along only doing the minimum, this way you take an active role in your debt elimination.
Let's take a closer look at a snowball. You start small and soon after rolling over and over they can build massive. Does that sound a little too familiar with your credit? Apply the credit card snowball effect in the positive way and you'll see it works.
Credit cards grow so fast due to something called compound interest. To put it simply when you only make the minimum payment you likely are not even covering the interest. Now that interest ends up as part of the balance and next month, you will be assessed interest on the new balance. Sound like a credit card snowball?
There are many people who will tell you to pay off the card with the highest interest rate first. This is what that plan will look like:
Write down all your cards.
Rank them in order of interest rate percentage.
Pay as much extra as you can each month on the one with the largest interest rate.
Do this over again for each succeeding credit card until you have eliminated them all.
There seems to be nothing wrong with the above example for debt elimination, and sometimes it is that simple. Nevertheless, situations are not all created equally and there will be times that demand a different solution.
Interest rates will vary from one card to the next. Some will be extremely high and some will have lower introductory rates. All things being equal paying off the highest interest rate would sound reasonable, nevertheless consider the example below.
To put this in terms that make sense consider the interest on your different cards and how your balance affects that number. Say, you have a credit card with a $5,000 balance at 10% interest; this means your monthly interest is fifty dollars. On the other hand, say that the other card has a $2000 balance at 20% interest rate. Your monthly interest would be forty dollars. The higher interest rate is actually cheaper per month.
The above example just goes to show that higher interest is not always the enemy of your debt elimination. The credit card snowball effect will quickly take your balance to new heights. Particularly if you are only making the minimum, payment required.
Let's take another look of how to use the credit card snowball effect to your advantage:
Make a list of all your credit cards.
Rank them according to amount of actual interest you pay each month.
Add extra payments to this card until the balance is zero.
Keep all other cards at minimum to free up cash to pay off the first card.
Repeat this process until all cards are paid off.
Life often has many paths to the same goal. Credit cards and debt elimination are no different. Always consider things from all angles before embarking on your debt elimination process.
About the Author:
Philip Crafton is an expert in managing your credit, he has mutilple years of experience in the financial industry. Apply for 0% interest credit cards and more at www.Credit-In-Minutes.com. Copyright 2008 credit-in-minutes.com
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