How to Pay Off High-Interest Credit Cards
Partly because of the ease of obtaining credit, many Americans go to bed at night with a knot in their stomachs due to their bills and the exorbitant amounts they are paying each month in interest. Credit card debt has spiraled out of control, and many consumers have had enough. Americans have fallen into the trap of buying more than their incomes will support because they don't want to wait until they can afford to pay cash. Things cost a lot more than they used to, yet wages have remained virtually stagnant since 2001. No doubt about it: life is becoming more expensive, even for the basics. Throw in an emergency situation, like a job layoff, an unexpected medical procedure or surgery, a natural disaster, and it becomes easy to see how so many consumers are falling deeper and deeper into credit card debt.
Getting a loan through a bank or other lending institution is not something most of us can do instantly. We have to apply and wait for the decision. But that credit card is there, in our wallets. Unless we have already maxed it out, we can charge what we want or need without any hassle–until the bill comes.
To put some reason into the mind-boggling goal of ridding yourself of the high interest you are paying, let's state the outcomes you probably desire most.
- You'll want to lower the interest rates you are paying
- You want more of your payment applied to your balance owing
- Perhaps consolidating your balances into one payment appeals to you. It certainly is the easiest way out of staggering debt
- If you are receiving collection calls, you surely want those stopped
- Eliminate late fees
- Eliminate over-limit charges
- Maybe you'd like to have fewer credit cards in your name
- You'll want to ensure your credit rating stays healthy. If your credit report needs some work, perhaps it would be a good idea to repair your credit
- Taking steps to make sure you don't fall into the credit card trap again will probably be a must on your list
Reasons to eliminate high interest credit cards
"Predatory lending practices," is the term being used to describe what some banks and credit card companies are involved in. Some of the predatory practices the credit card issuers can implement without regulation are:
- The credit card company has the freedom to change the terms of your credit card at any time. They can change the annual percentage rate, the payment due date, the annual fee, anything, with only a half-a-month's notice. Remain one step ahead of them by thoroughly reading your statements every month and any notices you receive in the mail.
- There is no cap on the late fees a credit card company can charge you. Even if you are fifteen minutes late with your payment, you will get stuck with a late fee that currently runs about $30. Along with the late fee will probably come a crippling new interest rate, and they may report your late or missed payment to the credit reporting bureaus.
- Credit card issuers are free to pick and choose whatever interest they want to charge.
- A single late payment on your credit card can turn into a huge plummet in your credit score. A drop in your score of a mere 50 points can mean that you will have to pay a much higher interest rate for things like cars or houses–anything, really. A drop of 100 points might mean you will be denied loans completely. Here is something many of us don't know and should. If you pay every one of your credit card bills on time but you are late paying another unrelated bill, like your cell phone, electric bill, or mortgage, the credit card issuer will find out, and use that late payment to send your interest rate soaring. They call it 'universal default.' So if you carry credit card balances, make sure you pay all your bills on time.
- Many studies have exposed the fact that credit card companies target those who are most likely to default: college students, teenagers, and people who have declared bankruptcy. The credit companies say that these high-risk groups are the ones who bring in the most profit, because they are more likely to charge more than they can afford. Credit card companies can mail enticing credit card offers to anyone: even young, unemployed teenagers. Why would they "waste their time" on such a population? Because statistics show that if teens and college students can be manipulated into deep debt, their parents will usually bail them out in order to save their credit.
- Credit card issuers were also behind the enactment of tougher bankruptcy laws–again, a measure that will benefit them, by making it more difficult for people to escape their credit card debt through filing.
- Some credit card issuers are starting to get rid of those of us who pay off our balances each month. Some try to slip us into an annual-fee-type account through the use of fine print and hard to understand wordy changes in terms. Read your credit card statement very carefully, every month because credit card companies typically notify you of changes in the fine print on your statement.
Read carefully, as well, any notices that come to you separate from your bill. Don't let yourself be caught unaware when your interest rate suddenly skyrockets or you are levied an annual fee for "not" carrying a balance on your card.
Ways to pay off high interest credit card debt
Home Equity Loan
The home equity loan can often be a great idea for debt consolidation. Do you own a home? If so, do you have some equity built up? The equity in your home is what a buyer would pay for your home, less the outstanding debts, such as how much you owe on your mortgage. The reason this can be a good idea is that a home equity loan almost always offers a much lower interest rate than your credit card. Plus, because it involves mortgage interest, it is almost always tax deductible. Do not take out a home equity loan to pay off credit card debt then turn around and charge up your credit cards again while you are paying off the home equity loan. You will end up in a deeper pit of debt than you were trying to climb out of in the first place. Do not take out a home equity loan if you have any fear or doubt about paying it back in full. You could lose your home.
Debt Consolidation Loan
Debt consolidation loans are another way to gather those unruly bills into one manageable payment. This type of debt consolidation loan bundles your existing debts together and presents you with one payment without requiring collateral such as a home.
Here are some facts, pros and cons, to consider:
- As always, make sure the terms of the consolidation loan you are considering don't add up to more than you are presently spending on your current debt. Because there is nothing to secure your loan, expect the lender to increase the interest they will likely charge you.
- If you have poor credit, expect to pay higher interest. The possibility of the lender turning down your loan is also higher.
- Shop around for rates and terms. Start with institutions you already do business with and go from there.
- Many consumers sign up for these loans on the Internet.
- You can also apply for consolidation loans at banks and credit unions. Credit unions many times offer better rates for their members.
More ways to pay off credit card debts
Many people believe that paying the minimum required amount on their credit card bill will bring down their debt eventually. It doesn't. If you only pay the minimum amount every month, you will be spinning your wheels. You can literally end up owing twice as much as you ever charged in the first place. Instead, add at least $50 extra to the minimum amount due. It would be better, if possible, to add several hundred dollars, depending, of course, on your balance.
Some other tips for paying off your credit card debts include:
- Don't use the card while you pay it off. Put it in the dresser or a safe. Lower your unnecessary expenditures so that you can pay cash for what you do need while you are paying off credit card debt.
- Pay off your highest interest rate cards first. Once you have paid off the card with the highest interest rate, move on to the next highest. It may be human nature to want to pay off the credit card that has the highest balance first, but choose the card with the highest interest rate. This is the one you really want to get rid of.
- For people who want to see faster results, a better idea might be to do the opposite. Pay off your cards with the lowest balances first. This can create a feeling of accomplishment. When a few of your smaller bills are eliminated, then tackle that high-interest card.
- Figure out which of your credit cards has the lowest interest rate. You might consider transferring the debt on a high-interest card onto this one. As you pay it off, you will save money by paying less interest.
- If transferring debt onto a lower-interest card that you already possess is not possible, then check out some of those unsolicited credit card offers you're probably getting in the mail. Most of them will be offering you the opportunity to transfer credit card debt onto their new card with the promotion of a very low interest rate for a certain period of time. Some even have a 0% rate. This could work to your advantage, if you're careful about it. First, figure out whether or not you can pay off the debt entirely before that initial teaser interest rate goes up. If so, great. Do it. Send in the extra money you would have paid on the higher-interest card, which will be applied to the principal of your debt. If you cannot pay off the debt entirely before the interest goes up, be careful. Read the fine print on the offer, because if you think you can simply do the same thing again and transfer the remaining debt onto yet another low-interest teaser card offer, you might get zinged badly. Some credit card companies penalize you if you transfer any balance off their card within a certain length of time, like a year, and force you to pay higher interest retroactively back to when you first got the card.
Just think what it will feel like on the day you send in the check that will pay off your last credit card. On that day, celebrate. You have earned it.
from a Credit Expert