As new provisions from the 2009 Credit Card Accountability, Responsibility and Disclosure Act take effect today, Americans are continuing to struggle with burdensome credit card debt. The number one question readers ask me is how to deal with credit card debt -- and the volume of e-mails on that topic has only grown during this recession. As you know, I've turned this column over to the cause of showing people how to "SAVE BIG." That's the title and topic of my new book, but more importantly it's my passion…maybe even my obsession. I'm happy to report that just as it's possible to buy and maintain a home or a car for less, it's possible to pay off a credit card for less. There are better, smarter and faster ways to pay off credit card debt that can help you SAVE BIG.
People always ask me, should I pay down the highest interest rate first or the highest balance first? That's a great question because you can, indeed, retire your debt faster by paying down your credit cards in the most beneficial order. The way to SAVE BIG is to move from highest to lowest interest rate. Why? Simply because the debt with the highest interest rate is costing you the most money. The less time you are carrying a balance on that card, the less time you will be paying that onerous interest rate. When that balance is wiped out, move on to the next highest.
Many respected experts argue that people should pay off the cards with the smallest balances first, for the psychological boost of finishing off an entire debt and moving on to the next. I think that's insulting. If you are reading this column you are a savvy consumer and you don't need artificial pick-me-ups that cost you money. Let's do the math. Let's say you have a $5,000 credit card debt at 29.99 percent and a $2,500 one at 9.99 percent. Here's how much it costs you in interest to pay them off if you make the typical minimum payment of $300 on the two cards plus add an additional $50 per month.
Benefit of Paying the Highest Interest Card First
Interest owed by paying lowest balance first = $2,641
Interest owed by paying highest interest first = $2,332
SAVINGS = $309
Why would you want to waste $300? I stand by my strategy. Fire on the highest interest debts first. If you would like to experiment with different payment strategies, check out this excellent calculator from Bankrate.com.
Now, here's a more unique strategy you may not have heard of. Instead of paying your credit card bill once a month, when it's due, try making a half payment every two weeks. Many of us are paid bi-weekly, so this evens out your cash flow. More importantly, it results in making more payments per year, since there are more than four weeks in most months. You've probably heard of this technique for paying mortgages off early. Well, it works for credit cards too. The reason is basic: there are two months of the year that you end up making three payments instead of two.
I'm going to use a real whopper of a debt for this example, to show what a difference this strategy can make. Let's say you owe $20,000 at 24.99 percent interest. A typical minimum payment would be $800 a month. So instead you send $400 every two weeks. Here's how this will help you SAVE BIG:
Benefit of Paying Bi-Weekly Instead of Monthly
Schedule interest owed monthly: $8,539
Schedule interest owed bi-weekly: $7,539
SAVINGS = $1,000