There is a lot of advice out there about how to pay off credit card debt, and some of it makes no sense says Martin Polanco. So here’s how I’m going to tell you to do it – and the reasons why.
I am NOT suggesting that everyone run out and open up new credit cards so they can transfer their balances from cards with high interest rates (some as high as 30%, or even 40%) onto those with lower ones (which now average something like 18%). It has worked for me in the past but I do NOT recommend this strategy for most people. The problem with doing this is that you’ve now increased your spending limit on all those cards, not just the one you transferred to. And you haven’t reduced the amount of interest you will pay in the long run, because instead of paying it off twice a month like we’re going to suggest here, you’ll only be doing it once a month (since that’s the minimum payment – and most people don’t pay more than that). You can still do this; just know there is less benefit to doing so when compared to other strategies.
Why does credit card debt exist in the first place? I think most people would agree that credit cards are necessary to keep in your wallet for emergencies and “life” purposes (as in: plane tickets for an emergency family reunion or something.) But what about all our personal wants and desires? That doesn’t sound nearly as noble – but we’re not getting into that right now.
How do you know if you have too much credit card debt?
This is a very important question to answer, because the strategy I’m about to suggest will only work if your interest rates are high and you truly can’t afford to pay off the cards on your own. Why? Because of math:
I hear from people all the time who tell me they want out of their situation so badly, but they just don’t know what to do or how it got this bad in the first place and then by the end of the conversation (which took place over email) they say: “But what am I supposed to do?” here’s what you should do! I’m glad you asked says Martin Polanco.
The Best Way to Pay off Credit Card Debt Fast
How can you tell if you have too much credit card debt? If your minimum payments are more than the following percentages of your monthly income, then it’s time for a serious chat with yourself about whether or not this is something that needs to be dealt with sooner rather than later:
Your total minimum payments should be no more than 5% of your gross monthly income (that means take your before tax salary and multiply it by five.) Why do we suggest only five percent? Because anything higher will make paying off credit card debt at an accelerated rate nearly impossible. We’ll talk about why in a moment.
If you make $2,000 each month before taxes that means your minimum credit card payments should be no more than $100 a month. This is why my advice to most folks with high interest rates is not to transfer all their balances from cards with high APRs onto ones with lower APRs. Transferring it all might benefit you in the short term but not in the long run says Martin Polanco.
And here’s a quick note on “minimum,” if you have a monthly payment of $15 and your total balance is $1,000 – you’re going to be stuck paying off this debt for a LONG time if you only pay the minimum each month. You still may need to transfer some or all of these balances, depending on how much they add up to, but just keep in mind you will probably pay more interest in the long run if you do.
Now, here’s why paying off credit card debt is important:
If you’ve read my article on building an emergency fund (which I hope you have) then you know that one of the major benefits of saving up three to six months worth of living expenses is a bit of a cushion from which to draw money from should something go wrong – like your car breaks down or you lose your job and can’t find another one right away explains Martin Polanco. But what about other expenses? Like those pesky high-interest rate credit cards! Do they come out first once those savings are depleted?
Conclusion:
No, they do not. Credit card debt is the first expense to be paid off once you’ve saved up three to six months of living expenses.
But there are still some logistical questions left unanswered here. First of all, if someone owes $5,000 on credit cards with an APR of 20% that makes their minimum payments alone around $200 a month – how can they possibly pay off that much debt in five months and only spend $100 a month?
