A few weeks ago, I told you about my friend with $68,000 in credit card debt. For most of it, that feeling of being in debt is crippling. We feel like our lives are out-of-control—like all the balls could drop at once.
So I reminded you to be strategic, to push the emotions out of the way and really examine the opportunities. Well, one of my readers asked me about a specific strategy for paying off credit card debt. Roger, thanks for taking my advice and running with it. I’m thrilled to help you find a strategy.
A lot of people are confused about paying down credit cards because there is so much contradictory advice out there. And the conversation can be even more complicated because sometimes your short-term financial interests are at odds with your long-term goals regarding your credit score.
For instance, if you consider your financial interests only, the smart move is paying offer the credit cards with the highest interest rate first because this one will cost you the most money. But from a credit-scoring perspective, you should pay off cards with the highest balance first (and/or transfer high balances to cards with lower balances) because the closer you get to a 30 percent utilization rate, the better.
So Roger, here’s my answer:
- Figure out when you are next going to need to rely on a high credit score. Are you buying a car soon? A house? Getting a new job? If so, protect your credit score by first getting all your balances below 30 percent of the limit. Once this goal is accomplished, start paying the card with the highest interest rate.
- If you are several years away from needing a high credit score, but you have that out-of-control feeling and want to get your finances in order, then you might need to sacrifice your credit score by transferring as much debt from cards with high interest rates to cards with lower interest rates, even if this means exceeding a 30 percent utilization rate rule—by a lot.
I know that what I just said might be controversial, especially coming from a credit expert, but the truth is that sometimes you have to sacrifice your credit score to make your life work. A credit score by itself is totally meaningless. It’s how you use it to enhance your life. And sometimes letting it take a nosedive is the best thing for your life. (In fact, even though it’s terrible for your credit score, I’m a proponent of bankruptcy sometimes because I think it can make people’s lives a heck of a lot easier.)
The good thing about the world of credit-scoring is that if you know what you are doing, it won’t take all that long to rebuild your credit score, so even if you do sacrifice your score, you can take the right corrective steps to see your score transform in a year or two.
I hope this helps Roger, and everyone else, too.
P.S. I’m sure this sparks some questions, so be sure to comment below. Depending on my schedule, I don’t always answer every question, but as you can see, I do read each comment!