Repaying multiple credit card debts can be challenging. There are multiple payments, different due dates and a wide range of interest rates that you could be facing.
In order to simplify the process, it may be tempting to get a consolidation loan. However, this does little more than create another debt. In fact, you could be in worse financial shape if you continue to use your credit cards while repaying a consolidation loan.
Balance transfers are another consideration. These have hefty fees however, and you may not always be able to consolidate everything on one card.
A debt management program can help you if your finances are in disarray, if you are behind or if you cannot afford to increase your monthly payments. There are limits on such programs, which could exclude you if you have a large budget surplus and the ability to repay your debt on your own.
Assuming you do have a large budget surplus, then prioritizing your repayment options might make sense. In other words, you can go on your own repayment plan and become debt free by following through.
Example of Debt Situation
Let’s assume that you have $15,000 in credit card debt. Perhaps it is spread across the following accounts:
- Card 1: $3,000 balance, $80 minimum payment, 14% APR
- Card 2: $700 balance, $20 minimum payment, 17% APR
- Card 3: $5,000 balance, $140 minimum payment, 15% APR
- Card 4: $1,000 balance, $30 minimum payment, 24% APR
- Card 5: $2,500 balance, $70 minimum payment, 12% APR
- Card 6: $2,800 balance, $75 minimum payment, 18% APR
If this is the case, mathematics will suggest that you should make minimum payments on all accounts while increasing the payment on Card 4 to repay it faster. However, you should understand that this strategy could result in a slow pay label, which could cause interest rate and payment increases on your other accounts.
Instead, you should add a small amount to the minimum payments. Perhaps an extra $10 monthly, or an extra $25 every 3 months can keep those accounts in good standing.
Card 4 definitely deserves the initial focus, since it has the highest interest rate. A monthly payment of at least $200 can help knock down the balance in just a few short months. Although Card 6 has the next highest rate, you might instead want to start with Card 2, since its high rate is comparable and you may more quickly repay its smaller balance.
It is up to you to decide how you would like to approach repayment. Just remember to celebrate a little victory as you complete repayment on each account. It is a good motivator and can reward you for each step along the way.
Card 5 is the final card that should be repaid. It has a much lower interest rate than the others.
Exceptions
There are some special exceptions that may apply that could change your strategy. These may include:
- Annual Fee: Since this can increase the cost, you might be better off repaying this card earlier and closing the account to avoid future fees. This is especially true if the card does not provide valuable rewards.
- Balance Transfer Offers: Some balance transfer offers that provide permanent, single-digit interest rates can help you reduce finance charges, thereby enabling an accelerated payoff. Consider the balance transfer fee and the available credit.
- Earned Interest Rate Reductions: Some creditors aggressively increase your credit limits and lower your interest rates to reward financial responsibility. Knowing which creditors are more likely to lower your rates as a result of accelerated repayment could influence your decision on which card to target first. Some earned reductions are automatic. Others you must request. This may be one of the most important exceptions to consider!
- Impact on Credit Score: Accelerated repayment can improve your credit score. However, closing an account after it has been repaid limits such score increases. Also, if you still owe other debts, closing one credit card account may increase your overall credit utilization rate, thereby lowering your credit score.
