It appears that most people are paying off their credit card debt all wrong.
Let’s say you have multiple cards with balances and a set amount of money to pay them down. The surefire way to minimize interest payments is known as the Avalanche Method: make the minimum payment on all of your cards, and then “dedicate all of your remaining money” to the card with the highest interest. Easy Right? As it turns out, the overwhelming majority of people are not paying their cards off that way. A study in England of 1.4 million people with multiple cards found that only 10 percent devote their excess cash to their highest-interest card. By splitting payments evenly among their cards instead, many were “loosing hundreds of dollars” each year in interest payments. Researchers say card holders are distracted by their overall balance and simply chasing “the big numbers on their statements.”
Sadly, after the holiday season those balances likely grew. Many Americans began 2018 with a “nasty financial hangover” after accumulating an average of $1,054 in holiday-related debt; 5 percent of consumers even racked up more than $5,000. Paying a $25 minimum monthly payment on that newly acquired $1,054 means it would take until 2023 to pay down the balance – and you’d be coughing up $500 in interest over that time.
Worst still is the Fed is projecting three interest rate rises this year. Half of American households have credit card debt, with the average family paying $904 interest annually on a balance of more than $15,600. For those saddled with high interest payments, these rates rises mean the cost of credit is bound to go up.
If you are surveying the financial wreckage of another holiday season you’ll need to make a plan now. If you only owe on one card, consider transferring the balance to a low – or no-interest credit card, which could shave three to four months off the time it takes to repay your balance. More work is needed it you have multiple cards in arrears. Although experts extol the Avalanche Method, you could also consider the Snowball Method. Its proponents suggest you make minimum payment on all of your credit card debt except the one with the lowest balance. You then funnel all the money you can afford toward that card. Once it’s paid off, you shovel all toward the card with the next lowest balance. Whichever method you elect, make sure you do not add more debt…which is provably the most self evident.
At Bourke Accounting we all know what it is like to use credit cards, or pay your bills late…we know life is hard which is why we have no judgement and strive to create an environment where you can freely discuss all of your financial concerns. Call us today at 502-451-8773 or stop by for a visit. Looking forward to seeing you soon!