When you have little cash in hand, credit cards are like a burning nail to hold on to. But beware! That burning nail could end up burning you. Keep in mind that it is very easy to be approved to receive multiple credit cards because the minimum monthly payments required are very low. But if you use more than 30% of your credit card limit for more than 30 days, your credit score may be damaged.
The truth is that, used correctly, a credit card can be an excellent tool to finance your business. You simply need to learn to use credit cards properly and to your advantage.
Is it better to leave an outstanding balance on your credit cards or pay off the debt completely?
It depends. The general rule is that you should never keep an outstanding balance in excess of 30% of your credit card limit for more than 30 days. Why? First, a credit card can be very expensive if you don’t keep the balance low: the average cost or the annual percentage rate (APR) in the US. UU. It is approximately 17%, according to creditcards.com. For example, you will pay $ 28 per month in interest only on an outstanding balance of $ 2,000. If you do not meet a minimum payment (usually 2% of your balance), you are likely to pay another $ 30 per month in late payment charges. Although these numbers seem small, they can add thousands if you have several credit cards used to the maximum and you have no way to pay them.
Second, using more than 30% of your credit card limit will begin to negatively affect your credit score. The lowest credit utilization rates tell your potential lenders that you know how to use the credit responsibly and without relying too much on it. But the same goes the other way around, resulting in a lower credit score and access only to expensive credit cards or loans.
Unless you are investing in something that helps you earn more money, we recommend that you pay your credit card balances in full, EVERY MONTH. If you can’t, then keep your balance below 30% of your credit limit and NEVER skip the minimum payment required. We know that it is easier said than done, so here are some tips that can help you manage your budget and control your credit card balances.
Methods to pay your credit cards
- “Avalanche” method : as your credit card debt accumulates, choose the one with the highest interest rate and pay that debt first. Send the highest payment you have to this creditor. Remember: you will still have to make smaller payments on your other credit cards. Once you pay the higher bill, focus on the next card in order from the highest to the lowest interest rate.
- Snowball method : with this method, you pay credit cards with the smallest balances and keep the minimum payments on the other credit cards.
Once you have chosen your method, create new habits and practices to prevent credit cards from becoming a worse enemy again.
Habits and tricks to pay your credit cards
Your new shopping habits begin by adopting a new mindset. You should be aware that you have credit control, and not vice versa. Your goal of paying off your debt can become a way of life. To begin the exchange process, here are some useful tips that will help you pay your credit cards and save money.
- Create a spreadsheet: use a free Google Docs spreadsheet to monitor your debt payment process. You can track your balances, payments, interest rates, due dates and minimum payments. You can see at a glance how much money you need to make the minimum payments required and decide what debt reduction strategies to implement.
- Obtain a credit card with an annual interest rate of 0%: find a card that offers an introductory zero percentage rate for 12 months or more. The same card can also allow you to transfer the balances of other credit accounts to consolidate a single debt with the same rate and the same term. After the term expires, the cards generally have a high variable rate between 15 and 25 percent. But you will still win because the card does not have an annual membership fee.
- Pay more than the minimum amount required: in addition to following the avalanche method or the snowball method of debt, you can pay more than the minimum amount required to pay your debt faster.
- Stop the debt process: you will continue to dig a deeper hole in your debt if you continue to use credit cards leaving a balance payable. If you have money in the bank to cover your purchases, use a debit card.
- Set up automatic payments: choose this option if you have enough money in the bank to cover your monthly payments. Otherwise, you may encounter bank overdrafts and late payment charges, which will establish a negative history of late payments.
- Reduce costs: review your expenses and analyze what you are buying. For example, every day you can fancy a good gourmet coffee, but have you thought how much it costs you a day, a month or a year? You will be surprised to know how these seemingly small daily expenses, in the long run, can add up to thousands..
- Stick to a budget: learn to live within your means. It’s as simple as this: your expenses should not exceed your income. Set up another spreadsheet, and in this, separate the expenses that appear in your checking accounts and credit cards into categories: food, utilities, entertainment, rent, etc., for a period of three months. Don’t forget to include in your list your cash expenses. That way you will know exactly where your money is going.
- Use your savings: Without running out of your account, try to get between $ 500 and $ 1000 a month to pay off smaller debts. You will feel better knowing that you are making positive progress.
- Get an additional job (one you enjoy!): Do you like to bake, cook or tidy up your home? Seize it! You can clean your garage and cabinets and set aside items in good condition. Set up a garage, go out and sell baked goods or second-hand items. You can set up an online account with eBay or CafePress to collect sales. Do you need more ideas? Find additional work at Upwork or sign up for Uber to get money as a driver in your spare time.
Once you pay your credit cards, do this!
- Commit to using your credit cards responsibly. You can use them to continue using them with caution keeping balances low and paying what you owe at the end of each month. That is a good habit that is generously amortized in your checking account.
- Commit to keeping your credit cards open. Closing all your accounts can negatively affect your credit score. This is because credit cards with zero balance remain in your credit card history indefinitely, and your potential lenders can access this positive information. You can leave your cards at home if you are tempted to use them.
Find out here what you should and should not do when it comes to credit cards
As you just saw, the good thing is that you always have options. You can use credit cards to your advantage: by keeping zero balance on your cards, you will increase your credit score and that can be your best weapon if you ever need to apply for a commercial loan.
But if you still have a high balance and want to pay it as quickly as possible, there is also a solution. You can apply for a commercial loan and use the funds to pay off credit cards. Keep in mind that not all lenders offer you that option. Luckily, some do. You can use a small business loan from Wemo Financial to pay personal loans or credit cards that have been used for commercial purposes, or that are negatively affecting your ability to finance your business.
These are other additional benefits: our interest rates vary from 1% to 2.5% per month – well below the interest on most credit cards – and applying for a loan will not affect your credit. All you have to do is fill out your application online. It only takes a few minutes and you will know immediately if you prequalify for a loan.