Many individuals focus heavily on their finances during the end of the year as they try to plan ahead to start the new year off fresh. People may want to make sweeping changes before the holidays are over to simplify their money management and eliminate unnecessary burdens and costs. While these goals are admirable and can help individuals get on the path to stronger finances, they can also leave room for error, especially when it comes to credit cards.
Credit card debt is one of the most pervasive financial issues many households are facing. As a result of owing potentially thousands of dollars in debt, many consumers are unable to save money, prepare for their retirement or meet other financial obligations. Eliminating these balances and weaning themselves off excessive credit card use is a smart way for consumers to improve their finances, but it’s important to do so the correct way.
Common credit mistakes to avoid
Some people may pay off their smallest credit card balances first and then close their account to avoid the temptation of spending again. As a general rule, most credit counselors encourage consumers to start paying off the credit account with the highest interest first, because this is the card that will impose the highest interest charges. However, if borrowers only have a small balance on one card that can be paid off with a single payment or two, there is no serious risk in doing this first. The harm may instead come from closing the account. The average length of time that consumers have accounts open – and in good standing – can actually keep their credit score stronger, whereas closing accounts can cause their rating to drop.
Another common error is transferring all credit card balances to a balance transfer card without first understanding the terms. Balance transfer cards with a zero percent introductory rate can greatly help borrowers eliminate their balance. However, it’s important to first calculate how much must be put toward balances each month to eliminate the full amount of debt before the intro period ends. Otherwise, rates may be higher than they were previously paying.
Finally, consumers who are trying to pay down their debt should avoid new charges during the pay-off process. During this period, rely on debit cards and cash to avoid adding to the balance and incurring more interest.