4. Pay off your credit cards. Why didn't I think of that?! Well you do need to get a handle on this or your financial life will rule you.
Now we get to the good stuff.
Whenever I carry a balance I notice that all of these unplanned expenses arise and require more credit to keep on top of. When I pay off my balance every month I am able to keep on top of the extra stuff. hmmm
Make a list of all of your credit cards (store cards too), their balances, and their interest rate. Sort this list by interest rate highest to lowest. The card on top of this list (highest rate) is the one we will tackle first. All extra money should go to that card first.
Extra money? HA! Only pay minimums on all other credit cards/debt. Still no extra money? Dump your cable for watching shows online. Cut out those coffees at Starbucks and make your own. Pack a lunch. Try to buy used by going to garage sales, thrift stores, and estate sales. Keep your car longer. Trade down to a more basic transport. Or dump your car altogether for busing and biking. There are always places to cut. Even if you just pull back on spending while managing your debt. It doesn't have to be forever. Once the first card is paid off put it on ice or in your safety deposit box and move on to the next card.
Eventually the number of credit cards in your wallet should be 2. I like having 2 just in case one of them doesn't work. There is nothing worse than being out of town with no working credit card. Even if you have perfect credit, someone can steal your card number and leave you in limbo.
The first card is for everyday use and you pay it off every month. This card can be a rewards card with a higher rate (Stay below 20%). Shop around and try not to pay an annual fee either. 1% cash back is typical on these types of cards. Read the terms carefully. A friend of mine got a card that promised 3% back on groceries. Since he bought all of his groceries at Target the card company only gave him 1%. Target is not exclusively a grocer blah blah blah.
The second card or back up card should have a low interest rate (under 10%) and no bells or whistles. If for some reason you must carry a balance use this card. It will help you pay it off faster. If you do have more than 2 do not cancel them yet. Your credit score may suffer if you suddenly have less credit on hand. You can start closing them once you are out of debt. You should also wait if you have a major purchase coming up. One big enough that they would check your credit.
My two cents: Many credit cards offer 0% interest for transferred balances for 6 months to one year. BUT there is usually a balance transfer fee of 3%. Do the math. If you have several credit cards and you know you're not going to be able to pay them all off in the 6 to 12 month time frame AND your current interest rate is higher than the balance transfer fee, then it may be worth transferring some balances to a new card while paying off your debts. But don't use the new card for new purchases since those charges will have a higher interest rate but will be paid off AFTER the transferred balance.
ReplyDeleteGood strategy. I like that you use their offers against themselves.
DeleteOne caution, If you do open a new card you should be disciplined enough to
A: not use the new card unless it's a true emergency.
B: close the old account*
*Closing an account will ding your credit utilization rate. Put the old card on ice until after any large purchases (House, New Car etc..)
There are so many opinions on whether or not it's a good thing to have open cards! I went with the strategy of closing cards as I paid them off (until I had just two total). But I was advised recently by our banker to open a third card and have at least one monthly bill charged to each card to continue building credit, but to make sure the total open credit available to us didn't exceed a certain percentage of our income. Blah. What a Catch-22 - having no debt in your name also means you're credit history is on hold. At least I'm disciplined enough now to not run up the debt.
DeleteI'd also add
C: As you pay off and cancel cards, consider keeping your oldest credit card even if it's not the "best" card. Having a record of the same card for 10 or 15 years looks good on a credit report.
This is why I started the blog! You bring up a important point. I've been saddled with a mortgage since the 90's so I hadn't considered the importance of credit history length. Thanks!
Delete