Another reason to pay off your credit card debts

Yesterday I read an interesting article in the Seattle Times about how (and why) to pay off your credit card debt as soon as possible. The article warns of a slowing economy and future rate hikes by the Fed, which will translate to higher interest rates on credit card debt. In addition to the higher rates, the slower economy may cause some people to have reduced income which will be more challenging with the high interest rate debt.

The article encourages readers to have an emergency savings fund and to focus on paying off credit card debt.

I recommend starting with reviewing your credit card statements. Look for services or subscriptions that you no longer need and that can be cancelled. I recently found a grocery service had auto-renewed a membership without any notice. I was able to cancel the membership and have the charges reversed.

Make a list of your debts, including the interest rate, amounts owed and the minimum monthly payment.

There are different strategies for paying off debts. The article mentions a couple of options, including transferring debt to a zero interest credit card – if you do this, be careful of fees that are often associated with a “zero interest” transfer. In addition, the “zero interest” rate is often a teaser rate. Depending on the amount of debt, it might be worth looking a home equity loan to consolidate debt. Both a home equity loan and a new credit card with zero or low interest will impact your credit score as it’s a “new debt”. However, it may be worth doing in order to stop paying double digit interest on credit cards.

If you are considering buying a home, refinancing or wanting to have a higher credit score, I suggest not closing your credit accounts. Ideally having 2-3 open accounts that are paid on-time with balances below 30% of the total credit limit will help keep credit scores optimal. It’s pretty disappointing to discover that after doing what is financially responsible by paying off all debt and closing it, that you’re punished with low or no credit scores. This is one of my many pet peeves with the credit scoring system.

And if you are considering buying a home, refinancing or obtaining a second mortgage or home equity line of credit (HELOC), please consult with your mortgage professional before making drastic changes with your credit. And if this home is located anywhere in Washington state, where I’m licensed, I am happy to help you!