Math and numbers can be your greatest ally, but those that know numbers well, also know how to manipulate them. Take minimum credit card payments for example: When you pay the minimum amount required to a credit card, bank, loan, etc, you are only covering what is called the “principal” of the loan. The principal is the original amount you agreed to borrow, without any interest. The interest rate is a percentage dependent on the principal. Making a small dent in the principal allows the interest to continue to be compounded off a large core, meaning you are not just standing still on your debt, but you are also allowing more interest to pile up.
When reviewing your credit score, you will see average numbers at best when only paying the minimums, which is great and all, but what about actually achieving financial freedom over time? Sooner or later you will reach that age in life when it’s time to start a family, buy a house, travel, or do anything else, and it all requires cash flow.
With that in mind, here are some tips for working toward credit card debt relief.
Understand Your Credit Score
Pretty basic, but massively important. If you have ever wanted the most straightforward evidence as to why paying down debt matters, take a look at the numbers creditors use to judge your worthiness of their loans.
From Entrepreneur: “The first thing to note is that the FICO scores of the national credit bureaus — Equifax, Experian, and TransUnion — use a different method than banks. For example, Experian uses a FICO 8 score, a different methodology from the FICO 5 score banks use. The FICO 8 scores creditworthiness on a 300 to 850 scale while the FICO 5 scores from 334 to 818.”
Here is the breakdown of FICO scores are calculated: 35% for payment history, 30% for the amount of available credit used, and 15% for the length of credit history, with credit mix and new credit applications each weighted at 10%. A credit score of 650-680 is considered the minimal requirement for most small loans.
Get Familiar with Interest Rates
Let’s do a little hypothetical: You need $5,000, you borrow $5,000. You make minimum payments each month, but you don’t seem to be moving the needle. Here’s the math going on in the background, via USA Today:
if you borrowed $5,000 on a card at 15% interest and paid a minimum payment equal to the lesser of 2% of your balance, or $10, you’d end up paying $7,789.37 in interest charges. And you’d be paying that balance off over more than three decades!
Now that you have the basics, here’s one more thing:
Using the Snowball Method to Make Payments
Believe it or not, the best way to avoid late payments and penalty fees is to save up to pay more than the minimum. Crazy idea, right!? But hear us out: Take a look at how gnarly this situation looks, provided by Yahoo! Finance:
“When you pay your credit card late, you could be charged a $28 fee the first time, and a $39 fee for subsequent late payments. These fees are bad enough, but they’re only the tip of the iceberg when it comes to the costs of paying late.”
However, you could save an additional $15-20 per month to put toward your credit card with the lowest balance. Start putting your budget into a calculator like this one. Once that’s done, head over to the Snowball Calculator to see what kind of cash flow you can generate with that extra $20 monthly.
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