Living paycheck to paycheck - 8 Sure shot ways to break the cycle

Living paycheck to paycheck – 8 Sure shot ways to break the cycle

Are you living paycheck to paycheck? If yes, then you are already in a financial crisis. Living paycheck to paycheck reflects that you are not able to manage your monthly financial obligations.
However, don’t be scared. You just need to break the cycle of living paycheck to paycheck.
There are more than one ways to get rid of the distressed finances every month.

The person who is living paycheck to paycheck is either spendthrift or a low earner.
So, to break the cycle, you have to learn to live on less and increase your income simultaneously.
Here’s how you can do it

1. Start following a budget right now

To stop living paycheck to paycheck, you need to start following a budget as soon as possible. It will help you to keep a close watch on your monthly income and your expenses. Most people in the US hate to follow a budget as this puts a restraint on their spending ability. But most of them are not aware of the fact that budgeting is the secret to financial freedom.

2. Keep household budget in order

Once you create a budget system according to your financial ability, you can manage emergencies, save money for the future, and make some additional expenses. A budget also teaches how to overcome the bad financial phase as well. Once you start following a suitable budget, you’ll be able to know the amount you spend and the amount you save. Thus, you can save more after meeting your daily necessities.

3. Take advantage of free budgeting tools and apps to form a budget

Budgeting is not so scary as many people think. Many budgeting tools and apps are available online. If budgeting sounds dull, then install the free app on your smartphone and start using it. Soon you can see the positive result in your personal financial health.

4. Restrict the usage of credit cards

By restricting the usage of your multiple credit cards, you can easily restrict yourself from incurring further debt. The more you buy things with credit, the more you’ll dig yourself deeper into the credit card bill. Keep your card at home so that you don’t get the temptation of using it. Instead of credit, use cash so that you can stop shopping as soon as your cash is exhausted.
Also, pay the credit card bills in full and within time. Try not to incur credit card debt. Otherwise, you will not be able to save money on your paycheck.

5. Cut down extra costs

To save money, you need to cut down unnecessary expenses. To stop living paycheck to paycheck, you need to save at least 10% of what you make each month. To do so, you have to cut down unnecessary expenses.
For example:

Avoid spending money on fast fashion

Go to a small store rather than a large one to buy your clothes. Instead of following the latest trend, make your own fashion statement. Buy jeans and T-shirts of bold color and use them for casual wear. You can also buy a black evening gown as this color never goes out of fashion. Keep a close look at the offers and discounts at your nearest stores and grab the opportunity of buying clothes at a cheaper cost.

Cut down on entertainment expenses

Curtail your entertainment expenses like the cable bill, movies, and expensive magazines, and save a royal share of your hard earned money. Try to be a little creative and find entertainment in flying kites, playing soccer, and going for an evening walk. You can also spend time with your friends and family at home along with some delicious snacks.

Cut down extra food cost

Try to change your food habits and save some amount of food. It is advisable to carry lunch at work instead of having food from outside. A sandwich can cost you around $20. So, if you carry lunch from your house, you can save $20 a day, which means $600 a month. Shop your groceries from small stores rather than large ones and keep an eye on offers and discounts. Also, gather discounts coupons and carry them along while going for shopping.

Avoid going to expensive restaurants

Most of the people love to eat out in fancy restaurants. But, too much eating out can be unhealthy for your wallet. A lavish dinner/lunch at an expensive restaurant can cost you nearly $2,000 a year. Instead, you can enjoy the homemade meal to save money. If you can restrain yourself from eating out at an expensive restaurant, you can save thousands of dollars a year.

6. Ask for a raise or do a part-time job

If you’re working hard and performing well in your workplace, then this is the right time to ask for a raise. Approach your employer in a right way to get paid according to your capability. You can also consider a side hustle to boost your income. Go online to get ample of ideas.
You can also boost your income by doing a side hustle. It will help you to earn more.

7. “Saving money” should be the only goal

Save, save, and save. No matter what amount, but consistency is required. Try to start small. It will help you to balance other mandatory expenses. With time you will be able to save enough money.

8. Be positive

Following a budget and saving money require some lifestyle changes. So, you need to keep patience and stay motivated while making changes in life. It is better for you to set a goal and try to achieve that. If you set a goal, you will always have that working in your mind, and you will constantly strive to achieve that. Once you are able to achieve the goal, you can reward yourself.

Lastly, there is no such rule or “Mantra” for breaking the paycheck-to-paycheck cycle. Living on less, changing lifestyle, and following a budget makes a difference over time. If you lose your patience while breaking the paycheck to paycheck cycle, talk to a financial advisor for support and motivation. Remember, with determination, you can start saving and the financial difficulties that you always had at the end of the month will go away.

Credit card debt is a way of life for Americans: Why so?

Credit card debt is a way of life for Americans: Why so?

“Credit card debt is a way of life for people in America” This statement is true.
According to the survey conducted by the, 39 million credit card holders are carrying a balance from the year 2017. Well, this is the cruel gift of having credit cards. Because most of the people don’t manage their credit cards properly.

It is true that credit cards are the most convenient tools for purchasing items. People are using their credit cards to buy daily necessities. They also use credit cards to purchase things that they can’t afford in cash. Whereas, the credit cards should be used for emergency purposes or for buying an expensive item.
Though this statement is not fully justified. Because, if a person manages the credit card properly, then the card can be used for buying necessities and expensive items too.
Credit cards are convenient for buying daily goods as carrying cash can be dangerous and using a debit card is not secured.
But more important is repaying the credit card bill in full and on time, which most people don’t do and fall into credit card debt easily.

According to the survey of wallethub, the average credit card debt in America is $1.03 trillion. 6 in 10 young people in America have admitted that they make frivolous purchases with their credit cards and this would be the reason for their debt.
On the other hand, nearly 2/3 of Americans who are in debt, have said that they racked up debts to manage emergency expenses like car repairs or medical bills.

The survey also showed us some facts: “People are now more easy with their debt.”
As per the survey, 43% of people have said that credit card debt feels normal. Though, 46% of people have agreed that their credit card debt makes them feel stressed.

So, now, this is also true that for most of the people in America, credit card debt is a way of life.

Why are people getting trapped into the credit card debt?

Surprisingly, some people said that they never missed any payment, but still they are in credit card debt. They said that they know it will take years to finish paying down the debt. Why so?

Making only the minimum payments

Most of the people are making the minimum payments on their credit cards. But making only the minimum payments on your card is not enough. Because minimum payments make just a dent in the principal of the debt. You must repay the total balance with interest to the company. Carrying a balance means you will be in debt for a long time while racking up huge amount of interest.

Getting attracted to the credit card rewards

Remember, credit card rewards are marketing gimmicks. The credit card companies are trying to entice people by offering reward points or miles. But, these marketing tactics are actually forcing you to spend more (Paying 18% more to get 25% back in reward). Instead of spending more credit to get the rewards, you should concentrate on getting the reward for paying the bill in full.

How to avoid credit card debt

Here are some ways to avoid credit card debt to live a peaceful financial life.

Get a credit card with a lower interest rate

Don’t sign up for a credit card with a higher interest rate for some mere privileges like discounts, rewards, and mile. Also, some people signup for a balance transfer card. Make sure you get the card that doesn’t charge a transfer fee.
Usually, the balance transfer card offers 0% APR for the first 15-21 months (Introductory offer) with no annual fee and a low or zero balance transfer fee. Here you need to move the balance to this card to repay the debts easily. However, you should try to repay the balance within the offer period. Otherwise, the interest rate will be added up and you may end up paying even more.

Avoid using credit cards randomly

It is true that credit cards are safe as you can move cashless. But it is also true that it doesn’t let you feel that you are running out of affordability. Remember, you shouldn’t use a credit card to buy whatever you want. Because credit cards are not free money. Use a credit card to buy things when you are sure about your affordability. In short, don’t buy things with a card that you can’t afford with cash.

Build an emergency fund

Some emergencies can force you to use credit cards. In most cases, people don’t repay the bill in full and fall into the debt cycle. Thus, you have to build an emergency fund to avoid using credit cards all of a sudden. Try to build 3-9 months worth of savings in an emergency fund to manage emergencies like sudden illness, accident, job loss, and natural calamity.

Lastly, though it is true that accumulating credit card debt is becoming our habit. But you can still stay away from this debt by living life with less. If you practice frugal living, you can easily avoid the enticing living style that most of the people are living now.


Debt settlement: Everything you need to know about it

Most of the people in our country are struggling to pay off their debts. The huge debt burden forces them to file bankruptcy to get rid of their debts. However, there is another option that can help debt-ridden people to get out of their debts.
If you realize that you are unable to repay all your debts, then you can settle your debts. Debt settlement comes across as an advisable option to get you out of debts instead of filing bankruptcy.
Though you can approach the debt settlement companies to settle your debt, you can settle debts on our own.
In this article, you will understand everything about debt settlement.

What is debt settlement? How does it work?

Debt settlement is a process where the debtor negotiates with the creditors to reduce the total debt amount. The debt settlement process can be done by the debtors or with the assistance of a debt settlement company.
In a debt settlement process, you should negotiate with your creditors to reduce the debts.
Debt settlement works well only when a debtor has been delinquent on payments. Unless a valid reason is stated to reduce the amount of debt, the creditor is not going to accept any amount less than what is originally owed.

Can you consider debt settlement to settle both secured and unsecured debts?

You can only settle unsecured debts like credit card debts, medical bills, store credit card, deficiency balances, and utility bills. You can’t settle secured debts like home loan, and car loan. However, you can settle private student loans because these loans are nothing but personal loans.

Can you settle the debt on your own?

Though you can settle the debt on your own, the task of negotiation with the creditors can be difficult. Thus, you can consider debt settlement service to settle debt.
To settle your debt, you need to enroll in a debt settlement program. Debt settlement program is also known as debt negotiation program. So, once you enroll in a debt negotiation program, the debt settlement process starts. The debt negotiator in the debt settlement company performs the task of debt settlement negotiation with your creditors to reduce what you owe.

What happens in a settlement program

If debt settlement seems to be the right option for you, then you need to enroll with a debt settlement company to settle your debts. Choose a debt settlement company who will help with debt settlement. The challenge is to reduce the outstanding balance you owe to the creditors. Thus, you should enroll in a best debt settlement program so that you can find the best negotiator who will negotiate on your behalf with the creditors. In a good debt settlement company, the debt negotiators are well trained to negotiate with the creditors. They have a better idea on the situation. Because of their expertise, you can expect to get better debt settlement service. Your creditors can agree to settle your debt and you can get out of the debt by paying a reduced amount.

Debt settlement pros and cons

Though debt settlement is one of the best ways to get rid of the debt, it has some pitfalls. Before you enroll in a debt settlement program, you should know the pros and cons of considering the debt settlement option.

Pros of debt settlement

  • You need to pay less than you originally owe to the creditors

    If there is a successful negotiation between the debt settlement company and the creditor, then you are required to pay much less than what is initially owed on the account. Debt settlement process excels in lowering the total amount you originally owe as compared to a debt consolidation program or debt management plan.

  • You can save money

    If you enroll in the best debt settlement program, then you can save money through the debt settlement assistance. The debt negotiator will help you to save money by reducing the total debt amount through a debt negotiation program. Most of the times, the debtor can save less than 50% of the original debt, which can end up saving a lot of money.

  • You can settle your debt fast

    A good debt settlement company can help you get the best debt settlement assistance. Thus, you can settle your debt in a much lesser time than some other debt relief options.
    Debt negotiation eases the burden of debt by creating a concrete plan of action which is achievable for the common person.

  • You can repay debt more hassle-free

    Debt settlement plan allows you to save money in a trust account. The settlement company will disburse the amount among the creditors when you have saved the required amount in the account. So, by enrolling in a debt settlement process, you can get rid of your debts hassle-free.

Cons of debt settlement

  • You need to pay tax

    You may face tax obligations if you decide to settle your debt. Since, you are not paying the full debt, so you are saving money. Thus, you are entitled to pay tax on the total amount that you have saved through the debt settlement process.

  • You need to pay a fee

    Besides the fees paid to the settlement company for paying the creditors, you need to pay a fee to the settlement company for opting the debt settlement service. However, there is no upfront fee.

  • Debt settlement can hurt your credit score

    Debt settlement process may have a negative impact on your credit score. If you are unable to repay the debts in full, then it can have negative implications on your credit score. After you settle your debts, your credit report will be updated as “Pay as settled”. Thus it will pull down your credit score. However, you can negotiate with the creditor to remove it.

Tips to follow when you settle your debt

  • Be clear in your debt settlement negotiation

    If you are facing financial hardship and, due to that you are unable to repay your debts, then the creditors might be interested to negotiate with you. Instead of giving all the details about why you cannot pay the dues, come up with a few sentences that you can consistently use to talk to the creditors. Above all, be honest. Don’t tell everyone a different story, which may backfire.

  • Talk politely with the creditors

    Keep calm while talking to the creditors regarding debt settlement. You will worsen the situation if you lose your temper. Simply describe your financial hardship to convince them for the debt settlement. Be in your best behavior while communicating with the collector. Your attitude can make a difference.

  • Know what you can afford to pay

    Before considering debt settlement, figure out the amount that you can afford and pay. However, if you enroll in a debt settlement process, they will assess your income and tell you how much you can pay in debt settlement.

    Lastly, debt settlement has its advantages as well as disadvantages. But if you are drowning in debt, then debt settlement can be the best choice since you can repay debts by paying a lower amount. Yes, debt settlement process can hurt your credit score, but you can rebuild your credit score with time. You need to add positive information to your credit report. For example, making monthly payments on time, staying within the credit limit and paying the credit card bill in full and within time. So, instead of not repaying the debt at all, you should pay the debt that you can afford. If you totally ignore your debts, then the creditors will sell your debt to the debt collection agency to collect it. If the collectors win the judgment against you, then you can be sued for the unpaid debts. So, you should settle your debts before they are sold to the debt collectors.

How much is it helpful to refinance student loans after marriage?

When you get married, many separate things tend to become one. Being a married couple you may have to experience a lot of new changes in your daily lifestyle. You might also have to make various financial decisions, like combining both of your finances by opening a joint account.

The same can happen with your student loan debt. When you are a bachelor, your student loans have a different impact on each of your credit scores, as both of your papers are separate as well as credit reports.

But once you are married, one of your debts may harm the other’s credit score. Couples can handle their love life and debt separately with their own earning. Some couples opt for a new method; they choose to consolidate their student loans through a student loan refinance option.

If both of you have student loans separately, then you may try to consolidate your student loans under any one of your names. You might be interested in consolidating your debt together so that it’ll be easier to share repayment responsibilities and get out of debt soon.

Can you consolidate student loans with a spouse?

After graduating from the college, you might have multiple student loans on your shoulder, and possibly your spouse have it too. It may become difficult to manage both of your student loan debt with multiple lenders, monthly student loan payment, and track several due dates.

The stress due to this type of debt can take a toll on your mental health. And gradually, it may affect your libido. Approximately one-third of borrowers stated to have experienced a decrease in their sex drive due to student loan debt stress.

Refinancing student loans after marriage can combine both of your existing student loans into a single larger loan. Many times, student loan borrowers might have multiple other loans, so through consolidation, it can be easier to handle them. However, if you have taken out the loan under a Federal Student Loan program, you cannot consolidate the loan with a private student loan under the same name.

So, how do you consolidate both of your student loans? You need to find a private refinancing company and approach to them. These private refinancing companies may allow student loan consolidation with a spouse, but you must remember that you’ll lose all the benefits of federal student loan. These benefits may include access to income-based repayment programs, eligibility for deferment and forbearance, and eligibility for student loan forgiveness.

Both federal and private student loans are eligible for refinancing through a private lender. But before refinancing both of your student loans together, you must ask a few questions to yourself:

  • Which loans should you tackle first?
  • What money investment can you put on hold?
  • How will you make monthly payments?
  • Can your tax status affect the income-based repayment plan?
  • Who’s going to handle the payments?
  • What do you expect from the student loan refinancing?
  • Do the refinancing fit in with your other financial goals?

Find out all the answers first. Then have a look at these pros and cons and decide if refinancing your student loans with a private company will work best for you.

Pros and cons of consolidating both of your student loans after marriage

a) Pros of consolidating student loans with a spouse

Refinancing student loans after marriage can sound appealing. So, if you want to consolidate your student loan with your partner, it will make a lot of sense. Here are some unique advantages of it:

1. You can manage the total debt with one easy payment

If you and your spouse have multiple student loans, it might become a headache to keep track of those due dates and multiple payments, every month. While handling so many accounts, it’s quite easy to make mistakes and forget payments. This may hurt your credit score and even cause you heavy late fees.

While opting for spousal loan refinancing, you may consolidate your multiple student loans into one. After doing so, you’ll have one due date to remember and one easy monthly payment to make.

2. You might save thousands from your wallet

When you and your spouse want to combine your loans and apply for a refinance, the lender might check both of your income and credit reports. So, both of your credit score and credit history will be evaluated while determining the new refinance loan terms. If one of your records are good, and your income and creditworthiness have a decent level, you might be eligible for a lower interest rate.
If both of you can qualify for a lower interest rate, you can easily manage to save a decent amount over the total loan period.

3. You could get a long term with a lower monthly payment

When you take out the refinancing loan to consolidate both of your student loans, you can choose a repayment term that suits you the best. If you have a shortage of money or having a financial hardship, you can opt for a longer repayment term. So, it’ll reduce your monthly payment to a significant level.
It is right that if you go for this method, you’ll pay more in interest over the length of the loan. But, on the contrary, you have a breathing space every month from paying a good amount that may harm your budget.

b) Cons of consolidating student loans with a spouse

While consolidating your student loans with a spouse comes with good benefits, there are some potential drawbacks also that you should consider before making the final decision.

1. You have to give up all the federal benefits and protections

You need to work with a private lender and refinance your student loans if you want to consolidate your loans together. If you have federal student loans (loans from the Department of Education) along with private student loans, you have to refinance the loans through a private lender. But don’t forget you have to let go all special federal benefits and protections when you refinance. These may include:

  • Income-driven repayment (IDR) options:
    It may be available based on your income and loan balance. With an IDR plan, your loan payments will be set at a percentage of your current income. If you refinance through a private lender, you’ll lose access to IDR plans altogether.
  • Loan forgiveness:
    If you refinance your student loans through a private lender, you’ll lose the privilege to opt for the Public Service Loan Forgiveness program.
  • Loan discharge:
    With federal loans, you may opt for a special option where your student loans could be discharged. For example, if you or your spouse become disabled due to any reason, you may apply for Total and Permanent Disability Discharge. But if you refinance, you’re no longer eligible for the loan discharge option.

2. You might have to carry your spouse’s debt even after a divorce

Unfortunately, if your marriage ends up in divorce, you still have to make payments on the refinance loan every month, considering the loan is taken out by both of you.
Any debt that is taken out before your marriage is solely yours. After the marriage, your spouse isn’t responsible for the student loans you borrowed while in college. If you divorce, the debt remains in your name.
If you consolidate your student loans with your spouse and refinance the loans in both of your names, both of you are equally responsible for paying off the debt. Even after a divorce, if one of the partners doesn’t keep up with the loan payments, the other one is still responsible for making them. If the 2nd person is you, it may affect your budget drastically.
So, you need to keep these cons in mind and make your final decision regarding student loan refinancing after marriage. But if you consider overall benefits and drawbacks, spousal loan refinancing can be a wise solution to help you manage your student loan debt.
So, do your homework and understand all the pros and cons of consolidating student loans together, and make the right choice for your family.

Debt consolidation program – How to consolidate debt in 7 steps

Do you have more debts than what you can handle? Are you having a hard time managing multiple bills? Will you feel much better if you have to make only one payment to creditors every month? If your answer is ‘yes’ to all the questions, then you can enroll in a debt consolidation program. But before you enroll in the program, let’s find out how to consolidate debt and who offers the best debt consolidation programs.

What is a debt consolidation program?

A debt consolidation program combines unsecured debts like payday loans, medical bills, and credit cards into a single monthly payment plan at a low-interest rate and an easy debt relief plan. In most cases, debt consolidation services are offered by debt consolidation companies. You make a single monthly payment to a debt consolidation company and they distribute it among your creditors. The process continues till you pay back all your creditors.

Read: Can debt consolidation be useful to you?

How to consolidate debt in 7 simple steps

In a debt consolidation program, you can consolidate debt in 7 simple steps, and those are:

  • 1. Pen down the number of debts you have along with the interest rates.
  • 2. Calculate how much you can pay on your debts after evaluating your budget.
  • 3. Sign up with a debt consolidation company.
  • 4. Complete all the formalities and enroll in the debt consolidation program.
  • 5. Explain how much you can pay every month to the debt counselors.
  • 6. Wait patiently and let debt counselors negotiate with your creditors.
  • 7. When debt counselors and creditors reach an agreement, start making monthly payments (which includes the debt consolidation fee) until you pay your bills completely.

What are the various types of debt consolidation programs?

In this country, you can enjoy 3 types of debt consolidation programs and these are:

  • Credit card debt consolidation programs where you consolidate your credit card bills into a single monthly payment plan.
  • Payday loan debt consolidation programs where you consolidate cash advance into an affordable repayment plan.
  • Medical debt consolidation programs where you merge unpaid hospital bills into a lower monthly payment plan.

Debt consolidation programs – Pros and cons

Pros of debt consolidation programs Cons of debt consolidation programs
You have to make one payment to one source every month You could spend more if the tenure of the program is too long or the fee is high
You have to manage only one bill You can get scammed if the debt consolidation company is fraudulent
You can save money on interest rates, late fees, and penalties
You can simplify your finances
You can eliminate debt fast

Who offers the best debt consolidation programs near me

  • Debt consolidation companies having proper accreditation and affiliation.
  • Debt consolidation companies having an affordable fee structure.
  • Debt consolidation companies that know the state and federal laws properly.
  • Debt consolidation companies having good track records and success rates.

See also: Multiple debts? 9 Ways to choose a great debt consolidation company

Debt consolidation program vs loan – Which one is a better option?

Debt consolidation programs roll high-interest unsecured debts into an affordable single monthly payment plan. When you sign up for a debt consolidation program, the debt counselors negotiate with your creditors for a payment plan with a low-interest rate. They talk about the financial problems you’re in and request them to cut down the interest rate on your bills.

Debt consolidation loans work in a completely different manner. With a debt consolidation loan, you replace your existing debts with a new loan at a low-interest rate. This means you pay off your existing debts with a new loan to save money. The new loan has fresh terms and conditions. So you may get more time to pay off the debt.

Now, the main question is, which one is a better option? A debt consolidation program or a loan?

According to many people, a debt consolidation program is better than a debt consolidation loan due to the following reasons:

  • It’s easy to qualify for a debt consolidation program. All you need to do is submit a few documents and pay the debt consolidation fee. However, in case of a debt consolidation loan, you need a good credit score and assets to be eligible for it.
  • When you look into debt consolidation for bad credit, a program is a good option for you. There is no credit check in case of a debt consolidation program. However, in case of a debt consolidation loan, lenders check your credit report and score. They determine the interest rate on the basis of your credit score. If you have poor credit, be prepared to pay high-interest rate on the debt consolidation loan.
  • You may lose your assets in case of a secured debt consolidation loan where you have to pledge collateral against it. If you fail to pay off the new loan, then lenders can seize your assets. You can’t do anything.

Is there any alternative to a debt consolidation program?

The decision to eradicate debt is much like the decision to shed those extra pounds from your body. The sooner you get started, the better for you.

Debt consolidation helps you to merge multiple debts into a repayment plan as per your convenience. However, if you have secured debts, then a debt consolidation program is not what you need. It won’t make your financial life easier. In this case, you might need to look at refinancing or bankruptcy as your way out.

If you want to cut the debt amount into half or more than that, then debt settlement is a good option for you. In this program, the debt negotiators bargain with your creditors for a lower payoff amount owing to your financial hardship. They try their best to settle your debt with a lump sum payment to creditors. The only negative side of debt settlement is that it drops your credit score since you’re not paying the full amount. You won’t face this problem in debt consolidation programs because you’re paying the full amount.

Here is the best debt settlement advice to consider prior to enrolling in the program.

Are you knocking off credit card debt the right way?

Are you knocking off credit card debt the right way?

Ultimately there are 2 ways to pay off credit card debts

(i) Pay off your debts in full. This means paying the full interest and principal.

(ii) Pay less than what you owe. This means keeping maximum amount in your pocket and paying the minimum amount to your creditor.

Now there are 4 ways to pay less than what you owe:

  • Debt settlement
  • Debt management
  • Credit card balance transfer method
  • Bankruptcy – Chapter 7 and Chapter 13

Debt settlement brings down your outstanding balance by more than 40%. The figure varies depending on the creditor and the overall amount.

Debt management pulls down the interest rate depending on your affordability.

Bankruptcy brings down your payoff amount through court’s intervention.

Credit card balance transfer method is a smart way of consolidating your debts. Here you can transfer your balance to a 0% interest credit card and pay off the outstanding balance within the introductory rate period. You can skip paying the high interest on your card.

There is yet another logical way to pay off your credit card debt. You pay a set amount on all your credit cards. Dedicate the remaining amount on the credit card with highest interest. It’s the optimal behavior.

The best and the most logical way to pay off credit card debt is to attack the card with the highest APR.

This process seems to be easy and practical right? But most people aren’t knocking off credit card debt in this way.

How are consumers paying off credit card debt?

A recent study on 1.4 million credit card holders having revolving balances revealed a few startling facts. The study was conducted to know how these people are splitting payments between credit cards. Are they splitting payments depending on interest rates or overall balance?


  • Debtors are allocating only 51.5% of their extra payments to the credit card with high APR. But the right way to pay off credit card is devote 100% of your extra payments to the highest interest credit card.
  • Only 10% of credit card holders are paying off debts the right way.
  • Debtors are evenly splitting their payments on credit cards irrespective of the interest rate and the number of cards in their hands.
  • Debtors are losing money on interest payments annually. Those who have 2 credit cards are losing $90 every year due to unnecessary interest payments. Those who have 5 credit cards are losing $327 every year for the same reason.
  • Top 10% of debtors with 5 or more credit cards are wasting $1000 every year due to improper allocation of payments.

Psychology behind the illogical consumer behavior

Some financial experts suggest debtors to pay off their smallest balances first for easy wins and motivation. But credit card holders are not doing that. What is the psychology behind it?

If you study all the payment models minutely, then you’ll realize that ‘balance-matching’ model describes the card holder’s peculiar behavior perfectly. In the ‘balance-matching model’,

“individuals match the share of repayments on each card to the share of balances on each card”

Suppose a card holder owes $12,000 on one card and $6000 on another one. He can afford to pay $1500 in a month on the 2 cards. There is a greater probability that the card holder will pay $1000 on the first card ($12,000) and $500 on the second one, irrespective of interest rates.

The psychology behind this behavior is that balance is the first thing that comes to mind when card holders think of credit cards.

The balance is shown at the top of the credit card statement in big prints. Moreover, individuals have a greater tendency to use “’matching’ heuristics in decision-making.” Card holders mostly make payments in relation to balances instead of interest rates. They are giving more importance to numbers instead of statements.

Most consumers don’t have any idea of where to start when they have huge credit card debt. They become clueless and thus start repaying debts in completely wrong order.

People are confused. They don’t know how their APR changes their monthly outstanding balance. This involves loads of calculations – daily rates, annual rates, daily balance, etc. It’s not that easy.

What is right and what is wrong?

Tough to say. Some financial experts recommend paying off the smallest debt first due to the emotional motivation. The psychological boost is a big thing for many debtors. Plus, this appears to be the simplest thing to do.

But is this the right financial move?

If you want to keep the maximum amount in your wallet, then this isn’t the best financial move. You should target the credit card with high APR and try to knock it off as soon as possible. Just look at the last part of the multi-page credit card statement. You’ll get the APR information there.

Use free online debt payoff calculators to figure out how much you can pay and save on your existing debt. Use this interactive APR calculator to figure out your yearly interest payments and other expenses. Apart from these calculators, you can use credit card payment calculator for eradicating your credit card balances.


Are you confused like most Americans? Do you want to pay off your credit card debt in the right way? If so, then call or make an appointment with a reputed financial company and get advice on paying off your debts.