Sally Herigstad is a certified public accountant and the author of “Help! I Can’t Pay My Bills: Surviving a Financial Crisis.” She writes “To Her Credit,” a weekly reader Q&A column about issues involving women and credit, for CreditCards.com. She also has written for MSN Money and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
I think we could pay off all our card debt more quickly if we devoted all our money to one card at a time. Does missing payments on some cards even mean much if we are just looking to pay off all the cards quickly?
There are serious negative consequences if you follow this plan that more than outweigh the positive aspects of paying off each card one by one:
Dear To Her Credit:
My husband and I have taken on a lot credit card debt over the years. As we face retirement in about 20 years, I am wondering if devoting one of our salaries to credit card payment would be a good quick way to eliminate the debt.
We make enough to make the minimum payments on the credit cards, but I think we could pay off the debts more quickly if we devoted all that money to one card at a time. We would have to miss some monthly payments on the others, but it will all be paid off soon, anyway.
Does missing payments on some cards even mean much if we are just looking to pay off all the cards quickly? I just haven’t found anyone online who has tried this, so I thought I would ask. – Amy
Making a huge push to pay off your credit cards and work harder on your retirement in 20 years is fabulous. I’m so glad you’re doing this now, instead of when you’re much closer to retirement age.
I see your logic in wanting to pay off one card at a time, even if it means missing monthly payments on some cards while you work on paying down debt on one card at a time. After all, when you chip away at all the balances at once, it may not feel like you’re getting anywhere. You want to pay off one card after another and feel that sense of accomplishment each time.
Tip: There are two popular ways to attack high credit card debt: the “snowball” and the “debt avalanche” method. With the “snowball” method, you gain momentum and a quick feeling of achievement by paying off smaller balances first. However, the debt “avalanche” method saves you more money by paying off the higher interest rate card debts first.
Unfortunately, there are serious negative consequences if you pay one card and neglect the others that more than outweigh the positive aspects. Here they are:
1. Late fees.
The first time you miss a payment, the late fee may be only $25. Every month after that, the late fee may be as high as $38. If you’re paying late on more than one card, that adds up. Remember you’ll also pay interest charges on your total balance, including the late fees. Things get worse so fast that you can feel like you’re running up the down escalator. Late fees alone should be reason to never, ever miss a credit card minimum payment.
2. The interest rates on your credit cards can go up.
Thanks to the “universal default” rules, credit card companies can no longer instantly raise your interest rates on all your cards because you missed a payment on one. That doesn’t mean missed payments can’t affect your rates, however. Your banks can and will raise interest rates, with 45 days’ notice, when you miss payments on their cards.
3. You’ll hear from the credit card companies that aren’t getting paid.
Banks quickly notice when you miss credit card payments. They will send overdue notices and call you. Their requests for payment will become more insistent. Eventually, they may sue you and go after your assets. I know you plan to pay off your cards soon anyway, but why let things even go that direction?
4. Your credit history and score will suffer.
You may not be worried about that, if you plan to pay off your credit cards and not apply for credit or a mortgage anytime soon. But you never know when you’ll need good credit, especially now that credit scores are used for so many purposes, from rental housing to determining insurance premiums. It’s a lot easier to preserve your credit than to try to quickly mend it after it’s broken.
If your objective is to get out of debt as quickly as possible, focusing all your efforts on one card at a time while you let the others slide is not your best strategy. It will actually take you longer and cost you more to get out of debt that way.
I recommend you make all the minimum payments, and then pay off the balances with the highest interest rates first. Yes, it feels good to pay off the lower-balance cards first, just to get them out of the way. But from a dollars-and-cents standpoint, you are better off reducing your overall interest expense by tackling the cards with higher interest rates.
In fact, you may want to look at low- or 0-interest introductory rate balance transfer cards. If you can transfer some balances, you can save on interest – plus have the motivation of knowing that you want to pay off the balance before the interest rates kick in.