Now that you’ve hopefully made the commitment to take control of both your spending habits and finances, the final step is to develop a plan to cut your credit card debt. With many credit cards now having rates hovering around 20% (or higher) and interest compounding monthly, this might not sound so easy. However, once you learn the art of leveraging your payments, it may not be as difficult as you might think.
To this end, it is important to learn how to use a credit card calculator, which is a very useful tool for determining just how much and how long it will take to completely pay off any given credit card balance. But before you get started, please first make sure that your browser is set to allow java scripts. If you see a yellow bar on top of this page, right click it and select the option that allows the use of java scripts, as some browser settings will automatically restrict them.
The Credit Card Calculator below is easy to use. For each card, simply enter the balance, the interest rate, and either the payment amount you wish to make OR the number of months you wish to pay off the total balance.
Now that you know how to use the calculator, let’s assume that you have three credit cards all carrying balances, and, through diligent budget management, you have $300 extra each month to apply towards paying down the principal balances. Card A has a balance of $2,500 and an interest rate of 22%, Card B has a balance of $1,500 and an interest rate of 12%, and Card C has a balance of $4,000 and an interest rate of 16%.
So which of these three cards do you think you should concentrate on paying off first? The one with the lowest balance? The one with the highest balance? The one with the lowest interest rate? The one with the highest interest rate? Or should you just split up the payments evenly?
The best answer is to first concentrate on Card A and then on Card C because these two cards are carrying balances with the highest interest rates. In this case it will probably take you about three years to pay off all three cards with just a few hundred dollars difference in your total costs, depending on which card you start with. If it makes you feel like you’re getting more accomplished by paying down Card B first because it has the lowest balance and can be paid off the soonest, that’s fine, too. Just remember though that by doing so it will probably cost you a few hundred dollars extra in the long run.
If you are looking at a longer term payoff period of say five years or more, the difference between which balance you start with first can be much more significant. In some cases, this can mean thousands of extra dollars and several additional months of having to make payments.
The strategy of paying down the card balance with the highest rate first and then using those savings to leverage onto the next card with the highest rate (also known as “snowballing”) is most often the best strategy to cut your credit card debt the fastest. This is because your monthly payments are leveraged to their maximum potential whereby the most possible money is applied towards paying down the principal and the least towards paying regular interest. Like a snowball slowly rolling down a hill, the impact is small at first, but as your balance gets paid down a little more each month, the speed with which your principal balance decreases really gains momentum.