I remember the first card I paid off was my Capital One card. Once I saw it paid off, I cut the card up, and threw it away, but I did not cancel it. Why did I do that you may ask? Well I had my emergency savings in place already, I paid off a card that was only worth 500 bucks, and I didn't need the card any more. I also wanted to keep the card open to build up credit so if I needed to on my auto loans I could refinance them at a lower rate. If you keep your cards open please check on them once every few months, the reason why is if they have either a monthly, or a yearly fee you don't want to have that count against you. To put it simply keep track of what is going on with your cards, even if you don't plan on using them again.
A great example of why one should keep track of their cards is my wife had a card through Applied Bank. I would not recommend them to anyone. They charge you on a monthly basis instead of a yearly fee. Think about it for a minute and you should be able to figure out why they do that, if not here's why they do it. If they can charge you a fee and earn interest because you forgot to pay it that month, or if you even pay it on time they still get a finance charge out of it. If you forget about it long enough now they are reporting bad credit on your credit reports because they charge monthly. Now the reason why we had such a bad experience is my wife had canceled the credit card and we paid it off completely. In around two months they sent her a new card which she did not activate. Then about six months later we get a collection call from their collections department telling us we own them around $290.00 because we have failed to pay the monthly charge for the last few months, so there was a late fee for every month, plus interest on the total balance which included the late fees. And because they didn't have proof that we had canceled the card we couldn't fight the charges. We ended up paying the entire amount, closing the account then calling the next day to make sure it was canceled. To our surprise the lady on the phone said no, and we needed to pay $70.00 to make it current. Luckily we got to a supervisor who figured out the agent was looking up the wrong person and confirmed our account was closed, and that if there was any letters sent to you to throw them away as they usually prepare them a month in advanced. We got one then after that never got anything again from them and the account was indeed closed. Learning experience for this issue is to cancel it on the phone, call back the next day and verify it was canceled. If it was not then send a certified cancelation letter via the postal service. You then have proof that you asked for the credit card to be canceled, and they won't be able to force you to pay any amount collected after you sent the letter.
Before I started this process I used to rely on my cards to get us through each month. I would pay off a good amount of the card, and then run it up again. Once I saw one card paid off, I quickly paid off my other cards, the next one was worth 950, and it was maxed out. It took me two paychecks to pay it off but I did.
Now can credit cards be a good idea? Here's an example of what I would consider using credit in a smart manner. A month or two before I started budgeting I had paid off $1,400.00 on my home depot card, and then put $1,600.00 on it for a new washer and dryer. The only reason why I took that as a good deal is because we had until January to pay it off interest free. That was eight months to pay off $1,600.00 which was $200.00 a month. That was something I could do because at this time I had a second job which was able to pay for a good amount of the bills.
How to successfully pay off your debts:
- Personal loans: If you have a personal loan from someone make sure that is paid off as quickly as possible. A person entrusted to you a sum of money and that person gave it to you because you had a need. Repay the loan back because you may be helping them in their time of need.
- Credit cards: Pay off your credit cards using a debt snowball method. For example take your card balances and list them from smallest to largest balances. The APR is not important in these cases. Take the minimum you can pay on the first one and setup your budget around that dollar amount. While you are paying down that card make sure you are still making whatever the minimum payments are for the other cards, we do not want your credit to be ruined at this point when it is still important. Once you have paid off all of balance on the first credit card, apply the same amount to the minimum of the next card in line. For example if you were paying $25.00 dollars on the first card, and on the second card the minimum was only $15.00 dollars, you would add 25 to 15 and get $40.00 dollars you will be spending on the second card. Keep that up all the way down to the last card until you have it paid off. This process can take anywhere from six months, up to two years depending on how much you make, and how much you have available to spend on your cards.
- Auto loans: Once you have paid off all of your credit cards work on getting your loans paid down. If you just finished paying off all of your credit cards you should be able to take all the money you were spending on your credit cards and pay down your auto loan as fast as possible. This process could take anywhere from one year to three years. But should be much less if you are working the debt snowball system.
- Mortgage loans: This will still take many years to pay off but once you have no debt other than your mortgage you should be able to build up a good amount of money to last you at least three, maybe six months. After that you should be able to pay down your mortgage quickly.
Don't get tricked into a consolidated loan! These are generally a bad idea. Think about it like this, if you have one big loan that covers everything you won't see as much of a return when you're working through the system as you would if you if you had a bunch of smaller debt to pay off.
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