If you’re living with excessive amounts of debt, you’re not alone. More than 43 percent of Americans currently owe more than they earn, and with credit card rates ranging anywhere between 10 and 30 percent, it’s no wonder the average person is carrying more than $5000 in credit card debt.
48. And they say: "When
will be this promise (the torment or the Day of Resurrection), - if you speak
the truth?"
49. Say (O Muhammad ): "I have no power over any harm
or profit to myself except what Allah may will. For every Ummah (a community or a nation), there
is a term appointed; when their term is reached, neither can they delay it nor
can they advance it an hour (or a moment)." (Tafsir Al-Qurtubi).
52. Then it will be said to
them who wronged themselves: "Taste you the everlasting torment! Are you
recompensed (aught) save what you used to earn?"
53. And they ask you (O Muhammad )
to inform them (saying): "Is it true (i.e. the torment and the
establishment of the Hour; - the Day of Resurrection)?" Say: "Yes! By
my Lord! It is the very truth! and you cannot escape from it!" 10. Surah Yunus (Jonah)
The Growing Trend of Rising Debt
An Ohio State University Study uncovered a startling trend in credit card debt: the younger you are, the more debt you’re likely to have. According to the study, people born between 1980 and 1984 have nearly $6,000 more credit card debt than their parents and more than $8,100 more than their grandparents.
What does this information tell us? Two things:
1.) Credit card debt is rising
2.) More and more people are spending more than they should, and hefty credit cards are one of the main culprits.
Tips for Dealing with Multiple Credit Cards
Having multiple credit cards isn’t unusual. You might use one credit card for emergency purchases, another for trips to the grocery store and yet another for your everyday purchases.
With each new account, however, it becomes more and more difficult to track and manage your bills. That’s why we’ve come up with a 3-step plan to help you determine which cards to pay off first.
1. Evaluate Your Interest Rates
If you’ve become burdened by your numerous credit cards and their resulting debts, don’t panic. Instead, start by looking at the interest rates of each of your credit cards. Since high-interest balances grow at a faster rate than low-interest balances, it’s usually a good idea to pay the high-interest ones off first. However, cards that have begun to accumulate penalty interest require particularly urgent action and should take priority over all others.
2. Look at Your Balances
If your interest rates are more or less the same, then another good rule of thumb may be to pay off the cards with larger balances before moving onto cards with more manageable debts. If you can devote a little more money each month to your cards with higher balances, you’ll help get your big debts out of the way first and make way for the smaller cards.
However, make an effort not to skip paying one card for another. Instead, aim to allocate more of your monthly spending to paying off the ones with higher interest rates. After all, large balances accumulate more interest than small balances.
3. Get Help from a Credit Counselor
Keeping on top of your debts can be hard, but you don’t have to tackle your credit card bills on your own. A credit counseling service can help you manage your debts and begin paying down your obligations in a controlled manner. Over time, you’ll be able to open up some breathing room in your budget.
Breaking the Cycle
A whopping 40% of families owe more than they make, which means more is going out than coming in. Not only are consumers taking on more debt, they’re taking longer to pay it off. With interest rates at an all-time high, taking longer to pay off your debt is simply adding to the problem.
The longer you spend in debt, the more you pay in interest, and the more you pay in interest, the more debt you have. It’s a vicious cycle, and it’s one that can only be broken with hard work, dedication, and a sincere want to get out of debt.
Make a Budget, Get Out of Debt
In addition to helping you tackle your debt, our credit counseling program also provides a variety of effective budget management tools, including credit management tips, household budgeting advice and other monetary management strategies to help you budget successfully.
There are many good reasons to never pay your credit card bill late, but are there any good reasons to pay it early? It would seem to go against all common sense to send in a payment well before the due date, but the more you understand about how credit cards andcredit reports work, it can be smart idea under some circumstances.
Here are four reasons why you might consider paying your credit card early.
1. Save Money on Interest Charges
When you carry a balance on your credit card account, you accumulate interest chargeseach day, based on your daily balance. So when you make a payment before the due date, you are lowering your average daily balance, which can reduce your interest charges significantly. Also, think of it this way: Since you earn very little interest from keeping money in a checking or savings account, but pay much more for that high-interest credit card debt, you stand to save money in the long run by making payments to your credit card as soon as possible. If you want to know how long it will take you to pay off that balance,this calculator can help you.
2. Improve Your Credit Score
When your statement period ends, and a statement is issued, that balance is reported to the major credit reporting agencies as debt, even if you ultimately avoid interest by paying your balance in full by the due date. That reported debt can lower your credit score if your balance is high during a particular month. By paying off all or some of your balance before the statement cycle even closes, you can reduce your debt-to-credit ratio and improve your credit score (you can see how this factor is affecting your credit scores by checking your free credit report data ). This can be an especially important factor when you are applying for a home mortgage or another line of credit.
3. Pay Off Your Debt Sooner
By making an early payment, you are committing your funds to paying off your debt, rather than merely planning on doing so in the future. Without having those funds available for other discretionary expenditures, you are unable to change your mind and spend the money elsewhere.
4. Free Up Your Line of Credit
If you anticipate making a large purchase, you can quickly use up your line of credit before a payment is even due. This is especially true when you consider that the typical statement period is about 30 days long, and your grace period, the time between statement closing and the payment due date, can be 21 to 25 additional days. And if you are traveling and have holds placed on your account by hotels or rental car agencies, then you may have even less of your credit line available by the time the due date arrives. By making early payments, you can free up your line of credit and ensure that all of your charges are approved.
When Not to Pay Your Bill Early
While there may be some very good reasons for cardholders to pay their bills early, it won’t make sense for everyone. If you are always avoiding interest by paying your statement in full, and you aren’t using a large amount of your credit line, then waiting until just before your due date to make a payment can be ideal. In this situation, you aren’t saving any money on interest charges, and your funds will remain available to you in your bank account for as long as possible.
Gearing up to apply for your first mortgage is equal parts exciting and terrifying. To calm your (understandable) jitters, you’ve probably done a lot of reading about interest rates, points, homeowners association fees and the like. After all, knowledge is power.
Unfortunately, many first-time homebuyers fail to consider the impact their credit card habits could have on their ability to get a mortgage. This sometimes leads to a nasty surprise when it comes time to finalize the loan documents.
The good news is that this doesn’t have to happen to you. Here are five credit card mistakes that could prevent from getting a mortgage – and how to avoid them.
1. Paying late.
One of the critical factors bankers and mortgage brokers look at when deciding the terms of your home loan is your credit score. Most lenders use the FICO score to assess your creditworthiness, 35 percent of which is determined by your history with paying your bills on time.
You probably see where this is going: If you habitually pay your credit card bill late (or any other bill for that matter) your credit score might be in shoddy shape. You’ll need to seriously tighten up your on-time payment record if you want to qualify for a mortgage.
Luckily, technology can help make this happen. For most folks, the easiest way to ensure that payments are made on time is to set up automatic payments for bills. You can also opt into account alerts so that you’ll get an email or text message when a payment is due.
Whichever strategy works for you is fine, as long as paying on time is a top priority.
2. Overutilizing credit.
Speaking of your FICO score, there’s another credit card-related factor you should be aware of before submitting your mortgage application: 30 percent of your score is determined by the amounts you owe on your credit accounts. This category is heavily influenced by your credit utilization ratio, which is the credit you have used compared with your credit limit. Usually, it’s expressed as a percentage.
Using more than 30 percent of your available credit on any of your cards at any point during the month can cause your credit score to drop. Again, the point here is probably obvious – if you typically carry a high balance on your cards throughout the month, now is the time to monitor them carefully and make sure you’re not exceeding that 30 percent threshold. If you start to get close to it, make a payment as soon as you can.
This might seem like a small move, but it could go far in improving your score at the moment you need it to be as high as possible.
3. Applying for too many cards at once.
Another big misstep that would-be homeowners make when they start getting serious about mortgage applications is simultaneously signing up for a bunch of new credit cards. Many folks reason that they’ll need the credit for moving expenses, but this is a bad move for your FICO score. Ten percent of it is determined by new credit inquiries, which are triggered when you apply for loans and credit cards. Adding several to your credit report as you’re trying to finalize the terms of your mortgage could be very damaging.
What’s more, applying for a bunch of credit cards at once is often interpreted as a signal that you’re in financial trouble. Even if your score stays solid, your mortgage lender might think twice about extending a big loan to someone who could be experiencing a cash-flow crisis. To be on the safe side, place a moratorium on credit card applications until after you’ve moved into your new home.
4. Never getting a credit card at all.
This one might seem strange, given all the dangers associated with overusing credit cards, but responsible swiping is critical in establishing a good credit profile. In fact, 15 percent of your FICO score is determined by the length of your credit history.
Aside from this, bankers like to see a credit history that’s long and strong before they lend you hundreds of thousands of dollars. If you’ve only had limited interactions with credit in the past, getting a home loan might be tough.
Since you can’t go back in time and apply for a credit card as a young adult, getting started today is your best option. If your credit history is truly nil, you might have to postpone homeownership for a year or so. But getting a card now and using it consistently and responsibly during that time will go far in helping show that you’re a reliable borrower.
5. Racking up debt.
You probably already know that credit card debt is expensive and potentially damaging to your credit. But did you know it could also be a significant obstacle to getting a mortgage?
Here’s why: Aside from your FICO score, a number that heavily influences lending decisions is your debt-to-income ratio. To calculate your DTI, you’ll need to add up all your monthly credit payments (along with certain other obligations) and divide this figure by your gross monthly income. Although standards vary from bank to bank, most like to see a DTI of 36 percent or less. If you’re carrying a ton of credit card debt, your DTI might be too high to get a home loan.
The smartest thing you can do in this scenario is pay off as much of your credit card debt as quickly as you can. This will improve both your DTI and your credit utilization ratio simultaneously, making you a much more attractive candidate for a home loan.
Be sure to keep these credit card pitfalls and tips in mind as you take steps toward realizing the American dream – happy house hunting!
Tight on cash and worried about how you’ll make your credit card payment this month? Waiting for a commission check, tax refund or insurance settlement so you can pay off bills? Or are you trying to use your credit card to pay for as much as possible so you can earn reward points or cash back?
If any of these scenarios apply to you, you may be wondering if you can use one of your credit cards to pay another credit card bill.
Unfortunately, none of the major card issuers we queried will let you pay your bill directly by credit card. It’s not surprising, though. If your card issuer accepted another credit card for payment, it would have to pay the merchant fee — which could be 2% to 2.5% or more of the payment amount. That means, essentially, they wouldn’t get the full payment from you.
In addition, there may be restrictions on this practice imposed by the card associations. Andrew Gerlt, Director, Global Brand & Product Communications for Visa noted in an email that, “Visa rules do not allow the payment of credit card debt with a credit card. We do allow for debt repayment with a debit card, however.”
If you really need to “charge” your next payment, there are workarounds. In fact, there are three — but they all come at a cost.
Get a Cash Advance
As long as you have enough available credit, you should be able to use your credit card to get a cash advance, and then you can use that money to pay another credit card bill. You can obtain a cash advance at most banks or credit unions, or at an ATM if you have a PIN for your card. The problem with this approach is that the interest rate on cash advances is often at a higher rate than purchases, and interest accrues right away. That means that even if you pay off that cash advance by the due date, interest will be charged. Always double-check the interest rate before you take this approach.
The RPTPP Method
If cash flow is the reason you want to use a credit card to pay another credit card, then there’s another way to accomplish this goal: the “Rob Peter to Pay Paul” method. Use your credit card for everyday spending in order to free up as much cash as you can to pay your credit card bill. It’s not ideal, or even recommended, but it can be an option in a cash crunch.
Transfer Your Balance
If one of your card issuers offers a balance transfer you can use that to pay down or pay off your other card. If you have already received convenience checks in the mail, you can use one of those to make a payment on another card (you can’t use a convenience check to make a payment on the same account, though). Or you can deposit that check into your checking account then use those funds to make a payment. If you haven’t received one of these offers in the mail, check with your card issuer online or by phone to see if you are eligible.
If your credit scores are strong, you may be eligible for a low-rate balance transfer card. Just keep in mind that these offers almost always charge fees ranging from 2% to 4% of the amount transferred. It’s hard to find a credit card that offers a 0% balance transfer with no fee, but they do exist.
Of the three methods mentioned here, this one is the best. A low-rate balance transfer offer can be a smart way to lower your interest rate while you pay off debt. Use a credit card payoff calculator like this one to compare the time it will take you to pay off debt with different interest rates.
Proceed With Caution
None of these approaches will help you earn reward points, so that option is likely off the table. And if your cash flow problems are anything but truly temporary, these methods may simply help you dig a deeper hole.
If you’re committed to paying more than the minimum on your credit card bill each month, you’ve got the right idea. But you may have noticed that you’re dealing with a moving target, as minimum payments sometimes get higher with every billing cycle. So why does your credit card minimum payment keep rising? Let’s find out.
How your minimum payment is calculated
First, it’s important to have a basic understanding of how your minimum payment is calculated. This varies a bit from issuer to issuer, but usually your minimum is determined in one of the following ways:
- As a percentage of what you owe (usually 1%-3%).
- As a percentage of what you owe, plus interest and fees you’ve incurred.
Nerd note: Keep in mind that most issuers also have a minimum minimum payment of $20-$35. So if neither of the two calculations above produces a dollar amount equal to the minimum minimum, this is what you’ll be charged. Also, if you’ve missed payments, the amount you’re behind on will usually be rolled into your minimum.
Sometimes, an issuer will use a combination of these calculations to determine your minimum payment. For example, the following is from a sample Cardmember Agreement used by Discover:
“The Minimum Payment Due will be any amount past due plus the greater of:
• $35; or
• 2% of the New Balance shown on your billing statement; or
• any Interest Charges and Late Fee shown on your billing statement, plus $20.”
If your minimum keeps rising, there are a few possible explanations
In general, you should interpret a minimum payment that’s rising month over month as a sign that you’re not using your credit card responsibly. Usually, a minimum payment is growing for one (or possibly some combination of) the following reasons:
You’re charging more – If your issuer is taking a percentage of your outstanding balance to calculate your minimum payment, charging more will cause this figure to rise.
For instance, if you usually charge $1,000 to your card each month and your issuer charges 2% of the outstanding balance as a minimum, yours will be $20. But if your spending starts to rise and you’re now habitually charging $2,000 per month, your minimum will puff up to $40.
You’re incurring interest – Most credit cards carry double-digit interest rates, so if you’re carrying a balance, these charges are getting tacked onto your minimum every month. Although it probably won’t pinch too much initially, over the course of several billing cycles your minimum could get very high.
You’re incurring fees – Habitually paying your credit card bill late, using cash advances or taking any other type of action that results in a fee could also cause your minimum payment to skyrocket. Most issuers roll these charges into your minimum until they’re paid off, and will continue to tack them on as you incur them.
You’re behind on your payments – If you didn’t make your minimum payment last month, it will likely be added to your minimum payment the following month. If you continue to miss payments, your minimum will continue to rise.
Tips for taming your minimum
Before discussing tips to keep your minimum payment at bay, it’s important to remember that paying just the minimum on your credit card is never a good idea. The only way to avoid getting hit with interest is to pay off your balance in full each month, which is an absolutely essential part of being an effective credit card user.
With that in mind, here are a few strategies for keeping your minimum payment under control:
- Pay your bill on time every month. This will help you avoid having multiple minimums pile up. Plus, you’ll be keeping your credit score in good shape.
- Keep a budget and track your spending. This will prevent you from charging more than you can afford to pay off in one month.
- If you’re already in credit card debt, pay it off. If you don’t, interest will keep accruing and your minimum payment will keep rising.
- Avoid fees. If you have a hard time remembering when your credit card bill is due, sign up for text or email alerts so that you won’t get hit with a late fee. Don’t take cash advances, and if you travel abroad frequently, get a card that charges no foreign transaction fee.
The bottom line: Rising minimum payments usually signal a problem with credit card habits. Use the Nerds’ tips above to keep your minimum – and your finances – in line.
Credit cards are great – right up until the time you receive your credit card statement(s) in the mail (or email if you receive e-statements). That’s when all of those purchases you made during the month come back to haunt you.
Anyone can run up a huge credit card balance – it doesn’t matter if you’re a shopaholic or a frugal spender who got retrenched or had out-of-pocket medical expenses to pay. The reality is that there are plenty of situations and emergencies that can run up your credit card balance!
But what happens when your credit card balance is too large to pay off in full? What happens if you can only pay the minimum or worse – can’t make payment at all?
How Will Paying the Minimum Affect Your Credit Card Repayments?
Ideally, you should be paying off your credit card balances every month for one major reason – to avoid the credit card interest rate on any outstanding balance you carry! That’s because the credit card annual interest rates are ridiculously high – ranging from 15% to 24%+ (varies by credit card).
Of course, if you’re carrying a large balance, you may not be able to pay it off in full. Sadly, too many people don’t make the effort to pay off their credit card balance(s) as fast as possible.
Instead some resort to making minimum payments – and that’s dangerous for two reasons:
#1 It’ll Take Years to Pay off Your Balance and Cost You Thousands in Interest!
When you pay only 3% of your outstanding balance or $50 (whichever is higher), it’s not a lot of money right?
But in time, the amount you’ll have to pay back IF you don’t make any further purchases with the card and make minimum payments will be more than you realise.
For example:
Let’s say you’ve run up a balance of $5,000 on your credit card.
The credit card has an annual interest rate of 24%
The minimum payment you’ll need to make on that credit card is 3% of the $5,000 balance or $50 (whichever is higher).
Since 3% of $5,000 is higher than $50, that comes to $150 for your first repayment (keep in mind your minimum payment will decrease slightly every month as you pay down your balance).
Now, how long do you think it’ll take you to pay off your credit card IF you don’t add to the balance and pay $150 (keep in mind you’re paying above the minimum payment required as the balance shrinks) every month until your card’s balance is paid off?
Here’s the answer:
It’ll take 56 months (almost 5 years!) to pay off the credit card – and the interest? That 24% annual interest rate will cost you $3,324 over the course of repayment, meaning that your $5,000 credit card balance really cost $8,324 to pay back!
BUT WAIT… it gets worse.
Let’s assume that you don’t pay $150 every month. Instead, you want to really pay the absolute minimum until your credit card balance is paid off. How long (and costly) would it be?
Here’s the answer:
It’ll take 165 months (almost 14 years!) to pay off the credit card – and the interest? That 24% annual interest rate will cost you $7,774 over the course of repayment, meaning that your $5,000 credit card balance really cost $12,774 to pay back!
Now think about this – if you paid $500 per month instead of the minimum, you would have paid off your credit card balance in 12 months (1 year) and the amount of interest you would have had to pay would have been $635.16, meaning your $5,000 credit card balance would only cost you $5,635.16 to pay back!
*Note: all calculations were rounded up to the nearest dollar and are for demonstration purposes only.
#2 Because Paying the Minimum Makes it Easier for You to Go Over Your Credit Limit(s)
The average credit card in Singapore gives you 3X to 4X your monthly income – meaning you could potentially have spending limits of $12,000 if you’re only making $3,000 a month!
Unfortunately, some credit card users see a $5,000 balance on their account and think, “bah, there’s no need to worry, I can make minimum payments since I still have another $6,000 of credit remaining”.
True, you might still have a lot of available credit in your account. But if you intend to continue using your credit card while making minimum payments – you’re taking a dangerous step towards going over your credit limit AND accumulating a massive amount of credit card debt (especially if you’re handling multiple credit cards this way).
For example:
Let’s say you do have a $5,000 balance on a credit card that has a credit limit of $12,000.
You make a minimum payment of $150.
But the following month you spend another $1,000 and grow your balance to exactly $6,000.
You make a minimum payment of $180.
The following month you spend $2,000 and grow your balance to exactly $8,000.
You make a minimum payment of $240.
Now you see where I’m going with this?
Seriously, if you’re only making minimum payments WHILE you’re still using your credit card every month – you’ll go over your credit limit in a matter of months. So if you absolutely must make minimum payments on your credit card, DO NOT add to the balance!
What About if You Can’t Make Payment?
If your credit card balance(s) has ballooned to an amount that you’re just not able to handle, the last thing you should do is ignore your monthly payments.
Instead, you should be working with your creditor(s) to find a solution that benefits everyone. This might mean working with your creditor to come up with a payment plan that’ll reduce your repayments to a more manageable level – until you’re financially able to make larger repayments.
Yes, your credit score will suffer because you’ll be carrying a large balance(s) on your credit card(s), but the damage would be MUCH worse if missed a payment or defaulted on your credit card account(s).
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