The Best Approach to Paying Off Credit Cards

The Federal Reserve Bank of Boston found that the average United States household has $15,788 in credit card debt in its 2010 "Survey of Consumer Payment Choice." The same survey revealed that American consumers have 609.8 million credit cards. It takes a focused effort to pay off the resulting debt, and there are different methods.

Process

• Howard Dvorkin, president of Florida-based Consolidated Credit Counseling Services, recommends paying off high interest credit cards first as the most effective approach. He states that card holders should double or triple their payments on their highest interest account. The extra money should be shifted to the card with the next-highest interest rate once the first card is paid in full. Repeat this process until every card has a zero balance.

Alternative

• Financial adviser Dave Ramsey advises using a "snowball" payment plan as an alternative to paying off high interest credit cards first. The snowball plan consists of paying as much as possible toward the card with the smallest balance first. The extra money is snowballed onto the card with the next lowest balance when the first balance is paid, and the process continues until everything is paid off. Ramsey states that this method lets consumers see progress quickly, which often inspires them to continue.

Benefits

• Paying more money on certain credit card accounts reduces the principal balance more quickly. Most of the payment amount goes to interest changes when a person pays just the minimum every month, Linda Sherry of the Consumer Action consumer advocacy group in CA advises. Debt load is reduced faster with a focused repayment plan, which potentially raises the card holder's credit score.

Considerations

• Pay-off power is increased for consumers who also lower their credit card interest rates. Lucy Lazarony of the Bankrate financial advice site explains that card issuers sometimes reduce rates upon request for good customers. The account should be up-to-date, with a good past payment history. The card holder can call the customer service number and ask for a lower rate. It often helps to emphasize the positive history and to mention competing offers. If the customer service agent says no, "What Every Credit Card User Needs to Know" author Howard Strong recommends calling again within a few months.

Warning

• People sometimes close paid-off credit card acounts, but this can hurt their credit ratings. FICO, the largest credit score compiler, explains that it looks at available credit as compared to amounts owed and the length of time an account has been open. Older accounts with positive histories raise the score. Consumer radio and television show host Clark Howard recommends keeping paid off cards and using them twice a year to create positive activity records. Make a modest purchase and pay it off within a few months. The on-time payments also raise the credit score, according to FICO.