Top Ten Reasons to Pay off Your Credit Card Debt

If you’re like most American’s, you enjoy a love-hate relationship with your credit cards. Mostly loving them when they’re available to spend on, and passionately hating them when the bill comes due! For that reason, I’ve decided to compile a list of the top ten reasons you should pay off your credit card debt. So, without further adieu, let’s jump right in!

10. Different Interest Rates

You should expect to see different interest rates on your statement - and be prepared to see them change periodically, too. In most cases, you’ll have a different interest rate for purchases, cash advances, or transferring balances, not to mention the ever-present fear of being hit with the dreaded default rate!

9. Trailing Interest

This is the interest from the time your credit card company cuts your statement until the time they receive payment from you. If you mail in checks, that interest adds up even more. You’re still responsible for this interest. For this reason, it’s vital that you ‘overpay’ by a few dollars on every statement, or you’ll be paying interest for all eternity!

8. Teaser Rates

Everybody loves the teaser rates! Usually, you get a low introductory rate that lasts for a short period of time; however people take full advantage by transferring high-interest balances over to teaser rate cards and save some money in the process. However, keep in mind that the teaser rate will end at some point and it may not be beneficial to have transferred debt that can’t be repaid in time if the subsequent interest rate is higher than your other interest rates. Also keep in mind that if you’re late once - even a day or two - you could LOSE your teaser rate and everything on that card would go to the higher interest rate.

They’re called Teaser Rates for a reason!

7. Penalty Rates

If you’re late or exceed your credit limit, your credit card company reserves the right to increase your interest rate - often to your state’s allowable ceiling rate - in most states, this is 30%. If your credit card company exercises this right, those rates could be applied to ALL of your outstanding debt, even those balances accumulated at a much lower interest rate.

6. Fees, fees, fees!

If you’re late with your payment, there’s a fee. If you go over your designated limit, there’s a fee. And, if you realize that mailing a check will cause the payment to be late so you decide to call and make your payment over the phone…there’s usually a fee for that too! To avoid any of these fees, pay your card off every month and watch your spending so you don’t go over your limit.

5. Fees Added to Your Balance

All those fees we just talked about, guess what? Those are added to your balance and may accrue interest on a monthly basis just like the rest of your outstanding debt.

4. Disappearing Grace Periods

If you pay your balance in full every month, you get a little period of time before interest starts accruing. This isn’t the case if you carry balances month to month. When you have an outstanding balance, any new purchases start accruing interest immediately.

3. Payment Allocation

Whenever you make a payment to your credit card company, the funds are applied to the lowest interest balance first. So, if you have purchases at 12% and a cash advance at 22%, payments you make are going to the 12% first, rather than the 22%. These higher-interest balances sit there accruing finance charges while you work on paying off the others. This is similar to any other loan you may have had - payment is applied to interest first and then principal because that’s how the financing company makes their money.

2. Double Cycle Billing

If your credit card uses double cycle billing to calculate your finance charges then that means they are using the two prior months worth of charges to determine your balance, whether you carried a balance the month before or not. If that sounds unfair, you’re not alone. Not only is it confusing, it’s extremely costly to those who only carry a balance maybe once or twice a year. If you’re not sure whether your credit card company does this or not, take a look at the fine print. If you can’t find it there, call customer service and ask. It’s better to know now then to be surprised later.

1. The Money Spent in Minimum Payments could be Used to Build Wealth

Let’s say that you have a credit card with $10,000 of outstanding debt on it. Most credit card companies determine your minimum balance to be 2% of your outstanding balance, so in this case that would be $200. Let’s also say that your credit card has an interest rate of about 13%. If you pay just the minimum balance every month, it would take you about six and a half years to pay the card off AND the total amount you would pay back would be about $14,480. However, if you didn’t have to pay those minimum balances on your card, you could concentrate on building wealth. Let’s suppose we take that $200 and regularly invest it in the stock market with an average annual return of about 11% for the same period of time. At the end of six and half years, you would have earned more than $19,000. Seems pretty clear to me which is the better deal and considering social security may not be around for much longer, building wealth is becoming more important than ever!

Not every card will have all of these problems attached to them and sometimes paying off debt is easier said than done. But, I’m a firm believer that if you want something bad enough, you can make it happen. Paying down your debt and building wealth should be a goal, even if you think you have plenty of time.

Now is the best time to start!

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