Downgrade Your Debt

This article is courtesy of Feed the Pig. Copyright 2011 American Institute of Certified Public Accountants.

Credit and debt are two of the nation's hot topics this year. And, as you may know, the two are closely related. Last Friday, Jme McCoy asked via Facebook, "In trying to pay off credit card debt, is it better to pay off the highest interest card first or the highest balance card first?" Here is the answer, along with other tips for managing your credit and debt.

• Minimize interest. In general, if you have more than one credit card, you want to pay off the card with the highest interest rate first. Pay the minimum payment due to your lower interest rate card(s) and then put the rest of your payment resources toward the card with the highest interest rate. This strategy will help minimize your interest expenditure.



• Max it out. You payment, that is. You should always try to pay more than the required minimum payment. Often the minimum payment due is barely more than the finance charges that month, which means consistently paying the minimum can lead you to carrying your balance for years and barely putting a dent in it.



• Think before you close. When working to get out of debt, many immediately want to close their credit cards once they are paid off. Although it can hurt you to have too many credit accounts, cancelling a credit card could negatively affect your credit utilization rate, a major component in the calculation of your overall credit score. Your credit utilization rate is the amount of credit you are currently using in comparison to how much you have available. If you close one credit card while still carrying a large balance on another, it can actually lower your credit score, since you appear to be close to maxing out your total available credit.



• Know your limits. Most credit card companies report your balances and payment history to credit reporting agencies, but some may not report your credit card limits. When your credit limits aren't reported, as is sometimes the case if you have no-limit credit cards, your scores may drop. This is because without knowing your credit limit, most credit scoring models don't know how to accurately calculate your credit utilization rate; the lower your credit utilization rate the better.

Remember the sooner you pay off your credit cards the better. Check out this Credit Card Pay Off Calculator to help determine what it will take to pay off your balance, and what changes you can make to meet your repayment goals. Visit http://www.feedthepig.org/ for more money saving tips.

Learn how to you can downgrade your debt through Family Services, Inc.'s Debt Management Program by clicking here.