You have debt. I have debt. Most everyone has debt. And you’re wondering what’s the best way to manage your debt? Is it better to pay off debt or make payments? How much of a difference will it make in interest charges? And will it affect your credit score?
In this article I go over the options and how you can make the best choice.
The most important thing:
The number one most important thing you need to do is. Make any and all payments on time. Above all being on time and having a good credit history are the biggest factors in keeping a good credit score. Whether you pay all at once, or you pay monthly, being consistent is the most important thing.
If you are able to pay off debt, then, of course, do it. Making payments over time will only cost you more money. For example: You have a credit card with a balance of $500. You have the money to pay it off. So just pay the $500. If you make payments just to build some credit history here’s what you pay.
Let’s say for example you pay $50 per month. A $500 credit card balance will take approximately 10 months of $50 and one month of $45. (Based on 18% card rate This calculation came from Bankrate.com). In other words, you’re paying an extra $45.
Yes, it will show a responsible payment history. However, you can make a purchase each month and pay your bill on time in full. This will create the same good history and won’t cost you any interest.
Other factors:
Keeping track of credit utilization: How much of your available credit are you using? Another key factor in determining your credit score is, what your balance is compared to your available credit. Keeping this ratio low is a good idea. A utilization rate of 30% or lower is suggested.
Consequently, if you pay off a card this can help your score. (Providing you keep the card open). If you do pay a card off. Be sure to make an occasional purchase with the card. If your credit card is canceled due to inactivity this will hurt your credit score.
So Back to the question:
Is it better to pay off debt or make payments? Let me offer an example. Say for instance you just opened a new credit card that has a 0% introductory rate. Of course in this case there’s no big rush to pay it off. Just be sure to keep track of the promotional period. you want to try and have it paid off by the time the interest rate jumps up.
Here’s a great thing to do is. If you do have a credit card with a low rate. Take the money you’re saving on interest during the promotional period. And pay extra on any other cards you may have. Try working on getting your higher rate cards paid off. This can help greatly with paying down credit card debt.
What if you decide making payments is your best option?
OK so you’ve weighed your options and you decide that you want to make payments.
Here’s a suggestion. Get a 0% interest rate card. You can find cards that offer a 0% interest rate for a promotional period of time for new cardholders. If you take the balance from the card you are thinking of paying off and transfer it to the 0% rate card. You will save a lot of money in interest. You may have to pay a balance transfer fee. However you will still save money in the long run.
You can spread your payments out to equal the number of months of your promotional period. Be sure to make all payments on time and don’t make any new charges. Also, be sure to pay the card off before the interest rate goes up. As a result at the end of the time period, you will have created some good payment history. This can, of course, help with raising your credit score.
Ultimately this is your choice:
If you choose to pay off some debt without leaving yourself short then the best advice I can give is, go ahead and do it. Making payments over a period of time just to help build a credit history can be expensive. Interest rates are high these days. Furthermore, you may not be helping your credit score any more than just paying off a card. Which by doing so can help your debt to available credit ratio.
Hopefully, this helps with the question: Is it better to pay off debt or make payments. Just remember you can build a credit history by making a purchase each month. And then paying off the card in full every month. This is the way I do it. I pay my cell phone bill each month with a credit card. And then I make an automatic payment to my card each month from my bank account.
What to keep in mind:
Remember, the most important element to keeping a good credit score is making all your payments on time. Whether you pay all at once. Or you take your time. Being on time will help your score more than anything.
Also, think about applying for a low rate card. Try and find one with a 0% introductory rate. Transfer your higher rate cards over to your new 0% rate card. Pay on time every month. And try to have the balance paid down by the end of the promotion. This way paying over time won’t cost you anything. And you’ll build some good credit history.
When considering Is it better to pay off debt or make payments make a list of pros and cons.
The pros: You’ll save money if you pay off your debt.
Pro: Your balance to available credit ratio will go down (which is a good thing) lowering your ratio can improve your credit score.
Pro: It will just feel good. (I always get a good feeling when I pay something off).
Pro: You have one less thing to worry about.
Con: There are not a lot of cons here. There’s only one. Don’t pay your cards down with money that you need in your monthly budget. Yes paying off a card can be great. However, if it leaves you short and you end up not paying something somewhere else then this defeats the purpose. Do the math. Can you afford to pay off a card? Don’t leave yourself short.
So is it better to pay off debt or make payments?
You make the call. You’re in charge of your debt. Hopefully, this gives you the information you need to make the right decision.
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“Is It Better to Pay off Debt or Make Payments?”
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