What Is Your Outstanding Balance?
Your outstanding balance is the amount of money you owe on your credit card, including accumulated interest and new purchases. Your monthly payment is credited toward your outstanding balance. If you make only the minimum payment, however, most of your money will go toward the finance charges without greatly reducing the principal balance.
Credit card companies are required to notify consumers in writing on each billing statement the number of months and the total cost (including principal and interest) involved in repaying the current balance if only the required minimum monthly payments are made. In addition, this information must also indicate how much the monthly payment must be to pay off the current balance in 36 months.
What Is The Best Strategy For Paying Off Your Outstanding Balance?
There are several strategies for keeping your credit card debt under control and eliminating the balance. Some of these are discussed in the following sections.
You may receive a substantial windfall, such as an inheritance, an employment bonus, or lottery winnings. You can use this money to pay off your credit card debt. This is typically a better use for your windfall money than investing it, since you'd need an investment with an after-tax rate of return of at least 18 percent to cover the cost of your credit card debt, in many cases.
The next best strategy is to stop using your credit cards and put as much money as possible toward reducing your credit card debt. You can rank the cards according to their interest rates and then systematically pay off your debt, sending the largest payment possible to the most expensive card. Make sure this payment exceeds the required minimum payment, since every additional dollar you pay decreases the amount of interest charged on your balance. Continue making just the minimum payment on your other cards until the most expensive card is paid off. You can then focus your repayment efforts on the next most expensive card.
If you have a credit card that is charging varying interest rates on different portions (e.g., cash advances or balance transfers) of your total balance, credit card companies are required to allocate payments exceeding the minimum payment to the portion of the balance with the highest interest rate first.
You can use credit cards with lower rates to pay off the higher rate cards. The money you've saved in interest can then be applied to your outstanding balance. The next time you're offered a lower rate credit card, read the conditions. If the new card's credit limit is high enough to pay off the older, more expensive card, make the transfer.
Caution: Some cards have acceleration charges that might let the issuer demand payment in full if it sees you are closing the account using another card.
Use An Interest-Reduction Strategy To Make Payments On High Interest Cards
In limited situations, it may make sense to use one card to make payments on another. If you have a card with an outrageously high interest rate and a high outstanding balance, you may not be able to get a new card with a high enough credit limit to transfer the entire balance. You may, however, be able to lower your interest costs somewhat by using a cash advance from a lower interest card to make payments on the higher interest card.
Caution: This strategy should be considered only as a last resort. Do not continue using the high interest card while you are paying it off. Close the high interest account immediately upon reaching a zero balance.
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