A few weeks ago I was writing the weekly Q&A Thursday post and realized I only had 3 submissions for the week. My friend Rachel was on gchat (a common occurrence for the bored PA) and I asked her to give me a final fourth question. What she gave me was so much of a gem of a question that I couldn’t just make it a Q&A Thursday question, I had to give it its own post.
Her question was obviously: How do you make your credit card payments really count against your balance?
When you are looking at a mountain of credit card debt it can feel like all your minimum payment is going towards is the interest you pay every month. And most of that is true. What you are paying down is similar to what home owners pay down, which is essentially a lot of interest at first, but as time goes on, you pay more against the principal until you have paid off the entire debt. This is known as amortization and is present in all loans. You don’t just pay against the principal or the main amount you need to borrow, you pay off interest and principal, which is why it takes so long to pay off a house or a car or why you can pay them off faster if you make higher or more frequent payments.
So what you’re looking for is a way to put more money into the principal and less into the interest. And the truth is that there is no easy way to do that, but here are some steps you can take.
1. Don’t put any more money on your credit card.
Seriously, just stop using it. If you have no money left in your bank account to pay your basic bills, your problem is not your credit card, but your cash flow and you can check out my post on how to deal with that. If your credit card balance is so big that you can only afford the minimum payment, you should be using cash for everything (or the cash equivalent in a debit card) and not adding new charges to your credit card. This not only increases you balance, but over time you’re paying more for your higher balance and new purchases. It results in higher minimum payments and therefore you’re putting less towards your principal balance.
2. Put any extra money towards your credit card.
This is you just paying more than your minimum balance or making a second payment partway through the month. Even if you just put in another few dollars, this can help pay down your balance faster and since you’re not putting any more on your card the minimum payment will go down, making more of your payment go towards your principal and not the interest.
3. Negotiate with your credit card company.
Credit card debt is unsecured debt. It means that there is no collateral for your debt. If you stop paying your mortgage the bank can take your house, but if you don’t pay your credit card balance, the credit card companies can’t take all the stuff you bought. Your account balance can go to collections, which will wreak havoc on your credit score, but so is having a high card balance.
The result of it being unsecured debt is that the credit card companies want you to pay off your debt. So if you’re drowning in your minimum payments or your high interest rate, call your credit card company and explain that you are having a hard time making the payments or the interest is too high. Most of them will lower the minimum payment, which is fine, except you’re still accruing interest, so your best bet is to ask for a lower interest rate.
But before you take that step, do some research into a low interest credit card with a different credit card company. This does not mean if you have a Visa, look for a Mastercard. It means if your card is run by Citi, look for a card run by a different bank, maybe even yours. When you apply for credit cards they ask if you’re going to transfer a balance and allow this balance to sit, interest free, for a period like 12-18 months. So as long as you’re not putting new purchases on the card, you should be able to pay the new, lower minimum payment on the new card without accruing any new interest.
If your credit card company refuses to lower the interest, then say you are going to transfer your account balance to a new card and close your account with them. Make sure you cite exactly which card you are going to transfer so they know you’ve done your research Most of them will then offer you a lower interest rate or at least a new card with no interest for a balance transfer.
If they don’t offer you the lower rate or the lower card, then transfer your balance, call them back and close your account. Done! I’ve done this before and advised clients to do this, especially with high interest store cards. I had a client paying 27% on an Old Navy Card. No. Do not do that.
I hope that helps, Rach!
Look for the next post about the two different schools of thought about paying off credit card debt!