Anyone who is carrying debt on their plastic is probably asking themselves how to pay it off, and how fast to pay it off – because carrying a balance can be very expensive. The easiest and simplest answer is that we should always pay off our credit cards as soon as possible. That’s because credit cards generally charge some of the highest interest rates of any consumer financial product. The higher the rate and the larger the balance left unpaid, the more it costs to service that debt – and you really don’t get anything back in return to show for all that effort. But most people who are pondering this question are not in a position to pay off the whole amount right away. Otherwise that would be a quick solution and they would not have to ask this kind of thing. For those people there are several things to consider in order to best understand the timing of credit card repayment so that you leverage your payments for the maximum amount of financial savings and benefits. Let’s start by looking at the mechanics of why it is wise to come up with a credit card repayment timeline.
The Nuts & Bolts of Interest Charges
Making a late payment or missing a payment can be terribly expensive because of penalties and damage to your overall credit rating. But the annual interest rate or APR is what gets most people into trouble, even if they are very good about making their minimum payments on time each month. For each of your credit cards, you should know the APR. A good idea is to write it down somewhere so you can refer to it whenever you need to. But thanks to new federal regulations enforced by the Consumer Financial Protection Bureau, the APR is also rather prominently displayed on all monthly credit card statements. If you cannot find it or don’t know it, call your credit card company and ask.
Here is an example of why that APR is so important:
Say, for instance, that you carry a balance of $1,000 on your card and the APR is 20%. That basically means that every year you have to pay the credit card company about 20% of $1,000, just for the privilege of carrying a balance – which is a form of loan or borrowing. That’s approximately $200 a year. If you don’t pay it, your balance the following year will be $1,200 – and then you’ll be paying 20% of $1,200. Within five years, the amount of interest you owe could almost exceed the original amount of your balance. Imagine buying something for $1,000 and then, five or six years later, owing $2,000 just because the interest cost so much.
That’s the danger of high APR balances that are not paid off quickly enough. But now consider how it would work differently if your APR was only 10%. That would mean interest charges on a $1,000 balance each year of approximately $100. Because the APR is half as much as the 20% APR, the cost of borrowing is slashed in half, too. So the key to saving money on credit card balances that you are gradually repaying is to try to carry that debt on a card with the lowest possible APR.
These are very simplified examples, but they underscore the seriousness of knowing your APR – which is perhaps the most important aspect of the mechanics of your credit card and how it works.
The Balance Transfer Strategy
One of the fastest ways to save on interest charges is to transfer a balance from a card that has a higher rate to one that has a significantly lower APR, as we saw in that example above. If you owe a balance of $100 on a card with an 18% APR and you transfer that balance to a card that only charges 12% APR, that is an immediate APR savings of 6%. You have to also factor in the surcharge that your credit card company may charge you for doing a balance transfer, so check on that before you transfer a balance by reading the Terms & Conditions section of the transfer offer or by talking to your credit card company. If you do a balance transfer, though, you still need to have a plan for paying off that balance. Otherwise you wind up just moving the problematic debt from one place to another without ever getting rid of it. So view balance transfers as a temporary fix, not a permanent game plan.
A great way to shift your high-APR debt into a cheaper repayment process is to take advantage of a balance transfer offer that comes with a very low or even zero-percent interest rate. Before doing this, find out exactly when the introductory or “teaser” rate expires. You will want to be sure to pay off the balance you transfer before that rate expires, because in most cases the APR will then skyrocket. Lots of cards offer intro rates such as 0%, 1.99%, or 2.99%, for instance, and the introductory offer lasts for six months, 12 months, or even longer. But then it zooms up to a rate that may be as high as 18%, 20%, or even more. That’s a trap you definitely want to avoid. So use balance transfer and low introductory offers to your advantage and then you should pay off those credit card balances ASAP before the attractive rate goes up and becomes a losing proposition for you.
The Blue Print Plan
One of the best plans – which doesn’t involve tricky expiration dates and special offers – is to use a credit card that allows you to do what some cards call blueprint payments. Here’s how that works. Normally whatever you charge to your card stays there until you pay off your entire balance. Some card companies, such as Chase (which calls its program “Blueprint”) offer ways to help you budget and schedule repayments and apply payments to specific purchases, to make it easier to chip away at a balance. Let’s look at the Blueprint options offered by Chase.
- Option 1: Full Pay
With Full Pay, pick the categories of purchases you want to pay off in full each month. Then pay those off to avoid paying interest on them. Meanwhile if you have other balances in other purchase categories that you don’t repay each month, those are the ones that you’ll be charged interest for carrying forward to the next month.
- Option 2: Split Pay
The Split Pay program lets you earmark payments to be applied to paying off larger purchases. You decide how much you want to pay each month or how fast (or slow) you want to pay it off. Then Chase calculates how to do that and you see the payment plan. The payment progress will appear clearly and separately on your statement.
- Option 3: Finish It
The Finish It helps you come up with a calculated repayment plan to pay off the entire balance. You tell Chase how many months you want to pay if off in, and Chase will show you how much you need to pay each month to make that happen. After you choose your plan the plan and your payment progress will appear clearly and separately on your statement.
What is Your Unique Situation?
Do keep in mind that you have to prioritize what to pay off first, based on your own individual situation. If you are between jobs and have to pay other bills like rent, a mortgage, or a car or student loan payment, for example, carrying a balance on your plastic for a couple of months might give you some financial relief. When you or your child needs medical care and you don’t have cash, putting the cost on your credit card for a temporary time may be the right thing to do. If you’re stranded overseas and need to fly home but cannot afford to without carrying a balance, that may be a legitimate time to use your credit card. In other words, use your credit card as a financial tool when it can help you solve an emergency problem. But in general, and to avoid going into debt you cannot handle, repay credit cards as soon as possible and use your cards in a way that helps you eliminate debt and interest charges.
What About Building Your Credit History & Score?
Many cardholders want to also be proactive and smart about taking deliberate steps to raise their credit score, so they will carry a manageable balance on their card. They do this because they believe that carrying some debt but still making your payments on time every month shows how responsible you are, and looks better on your credit history. But they are only partially correct. You should never carry a balance on a credit card just to try and boost your credit.
The Best Plan of All If You Can Do It
If you charge some purchases but then pay them off before the due date, that’s the way to strengthen your credit. An even more effective approach is to only use no more than 20 or 30 percent of your available credit at any one time – and still repay the balance before the due date so you don’t carry a balance that gets charged an APR. If you have available of credit of $1000, for example, but you only spend about $200 during the month and then you pay off the balance before the due date, that is a fantastic way to manage your credit cards and pay them off wisely to raise your credit profile.