Things To Know As You Pay Down Credit Cards

by John Csiszar, Demand Media
    There are many ways to pay down credit card debt.

    There are many ways to pay down credit card debt.

    Starting a new life together with a lot of debt can make those first few years harder than they should be. Paying down your debt can help you free up your finances and avoid interest charges. Most likely, you'll also improve your credit score, which can help you obtain future credit -- such as a home mortgage or car loan -- at a lower interest rate. Different payoff methods can lead to different credit results.

    Will Credit Cards Work With You to Pay Off Debt Sooner?

    If you're a good negotiator, you might be able to get your credit card company to lower your interest rate or even the amount you owe. Unfortunately, you're more likely to be successful if you've already fallen behind in your payments and have damaged your credit report. If you do manage to get a reduction in your interest rate or balance, the card company might freeze or close your account. You might also be on the hook for any debt the company cancels, as the IRS typically considers such debt to be taxable income.

    Should You Redo a Mortgage to Pay Off Credit Card Bills?

    In most cases, the interest rate you pay on your credit cards will be higher than the rate on your home mortgage. Additionally, you can't take a tax deduction for your credit card interest, as you can with your home mortgage interest. If you can reconfigure your mortgage to take money out to pay your credit card bills, it might make financial sense. However, factor in all the costs of refinancing a mortgage before committing. You could also consider a home-equity loan as a resource for paying off your credit cards, if you can obtain one with a lower interest rate.

    Does Paying Down Credit Cards Quickly Drop Your Credit Score?

    Paying down your credit cards can be the single best and quickest way to improve your credit score. The amount of debt you have makes up 30 percent of your FICO credit score, so reducing the amount of debt you have can provide a big boost to your scores almost immediately.

    Does Paying a Credit Card With Another Credit Affect Your Credit Score?

    Credit card issuers sometimes offer interest rates as low as zero percent on any transferred balances, which can be a good way to reduce your overall interest costs. However, when you transfer a balance, you don't actually lower the amount of outstanding debt you owe. If you transfer too much to the low-rate card, your credit utilization, or the percentage of available credit you are using, will shoot up dramatically on that card. A high credit utilization ratio can lower your credit score. While your overall credit utilization may remain the same, having any card with a utilization of at least 35 percent could be damaging to your score.

    How Paying the Minimum on Your Credit Cards Affects Your Credit

    Almost two-thirds of your FICO credit score is dedicated to your payment history and the amount of debt you have. If you only pay the minimum on your credit cards, you'll score points for making timely payments, but you won't do much in terms of lowering your overall debt. When you make minimum payments, the time it takes to pay off your entire debt increases dramatically, and the total amount of interest you'll end up paying skyrockets. Credit card companies are required to include on card statements the effect of making only minimum payments, so you can see the numbers for your own situation on your most recent credit card bills.

    About the Author

    John Csiszar began writing in 1989 at the ERIC Clearinghouse for Junior Colleges. His work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.

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