Knowing how and when you should pay off your credit debts, is crucial to understanding how the action affects your credit score. Read more here about how to pay off your credit card.
Should I pay off my credit card debt all at once?
Paying your debts off as soon as you can is always the best decision to make, whenever you’re able to. The more difficult decision comes into play if you have more than one debt or line of credit on your name that you want to pay off. The sooner you’re able to pay off your debts, the more you’ll save on interest and also keep your credit score at a good standing. For credit card debts, paying them all off at once as opposed to paying them off monthly, is a better choice to make. This will decrease your credit utilisation ratio instead of continuing to pay off minimum monthly amounts. Your credit utilisation score is a ratio between your credit card balance to the total credit limit. Keeping this ratio under 30%, preferably in the single digits, is best for your credit health.
Why credit card debt matters
Credit card debts are the most expensive to keep as they have the highest interest rates and carrying large balances on cards can hurt your credit score. Credit cards have a direct impact on your credit utilisation ratio, that is why keeping your credit debt and balances as low as possible is key. Tackling your credit card debts is a sure way to lower how much you are paying in interest while improving your credit score.
What if I have multiple credit cards?
So how should you go about paying off multiple credit card debts? Is there a particular order? It might be too much pressure to pay off everything at once. Targeting the right credit card first would be a financially more strategic decision (depending on your unique personal situation). Using the debt avalanche method will allow you to save money on interest as you pay minimum payments on all your debts, besides the one with the highest annual percentage rate (APR). This means you would pay the highest interest rate card off first. Once this card is paid off, move onto the next highest APR.
Why you shouldn't use your savings to pay off credit card
Let’s say you have 3 months of savings put away after months of budgeting and saving to form the basis of your emergency fund. And you have credit card debt that you need to get rid of. It might be tempting to use that savings to pay off your debt. However, this could put you at risk of going back into debt when you might need funds to cover bills during a period of unexpected unemployment or a medical emergency.
How to pay off your credit card debt without dipping into your savings
To avoid using your savings to pay off credit card debt, there are certain strategies that you can use to pay out of pocket.
Review your spending habits:
Create a budget and payment schedule so that you can be certain you’ve accounted for payments you need to make. Minimise spending on luxury expenses such as take-outs or subscriptions.
Find the right payoff plan:
- Avalanche method as highlighted before means making the minimum payment on all of your accounts and then putting as much as you can afford to the account with the highest interest rate. Then moving onto the next account with a high interest rate.
- The Snowball method consists of making the minimum payment towards all of your accounts and then as much money as possible toward the account with the smallest balance. Once this debt is paid off, funnel funds towards the next account with the next smallest balance.
- Balance transfers allow you to transfer an account with a high interest rate to a card with a lower interest rate so that you pay less interest over time.
- A personal loan could also be used to pay credit card debt, only if you’re able to manage the loan repayments.
- Debt settlement or consolidation requires you to work with a debt consolidation company or a financial advisor to form an agreement where all your debts are gathered to one source and only one monthly payment is needed.
Paying off your credit card debt relieves some financial stress and will give you more freedom and money to work towards your goals. Aim to pay off debt when you can to put you in a better financial position for years to come.