Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013 for use by Evan R. Guido.
I recently incurred a significant amount of credit card debt. How should I begin to pay it off?
The best way to pay off credit card debt is with a single lump-sum payment, which would allow you to get back on solid financial ground quickly, without having to pay additional interest. Sources of funds that can be used for a lump-sum payoff include any substantial windfall, such as an inheritance or employment bonus. However, most individuals find themselves getting into credit card debt due to a lack of funds in the first place, so this may not be an option for everyone.
If you have multiple credit cards that carry outstanding balances, the next best strategy is to prioritize your repayment and systematically pay off your credit card debt. Start by making a list of your credit cards, and prioritizing them according to their interest rates. Send the largest payment possible to the card with the highest interest rate. Be sure to continue making payments on your other cards until the card with the highest interest rate is paid off. You can then focus your repayment efforts on the card with the next highest interest rate, and so on, until they're all paid off.
Another option is to transfer your balances to a card that carries a lower interest rate. Balance transfers can allow you to reduce interest fees and pay more against your existing balance. One of the dangers with this method lies in the fact that an excessive amount of balance transfers can end up having a negative impact on your credit score.
If you own a home and have enough equity, you may be able to use a home equity loan to pay off your credit card debt. The interest on home equity loans is typically lower than credit card interest rates and is usually tax deductible. While home equity loans can be an effective way to pay off debt, you'll need to be careful not to incur additional debt, particularly if you end up having an available line of credit.
Finally, whenever you're attempting to tackle a significant amount of credit card debt, always be sure to pay more than the required minimum payments. Otherwise, you'll continue to carry the bulk of your balance forward for many years without actually reducing your overall balance. You can refer to your monthly statement for more detailed information on the impact minimum payments will have on your credit card balance.
Evan R. Guido
Vice President of Private Wealth Management
One Sarasota Tower, Suite 806
Two North Tamiami Trail
Sarasota, FL 34236-4702
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