I’ve helped countless clients navigate the world of credit cards and their associated interest rates. As a broker (and someone who once had thousands of dollars of credit card myself) I know how it can negatively impact a mortgage or loan application when you want to buy a property.
One of the most common questions I get asked is: “How can I pay off my credit cards sooner? It seems impossible!”
The truth is, paying off your credit cards sooner can save you a significant amount of money in interest charges over the long run. This not only saves you money each month, but it also frees up cash flow to redirect into savings, for a house deposit, home reno or your next investment.
Here are a few examples of how much you can save by paying off your credit cards sooner.
Example 1: Credit Card Balance of $5,000 at 18% interest
Let’s say you have a credit card balance of $5,000 and your interest rate is 18%. If you only make the minimum monthly payment of 2% of the balance (or $20, whichever is greater), it will take you over 20 years to pay off the balance, and you will end up paying over $8,000 in interest charges!
However, if you increase your monthly payments to $200, you will pay off the balance in just over 2 years and save over $6,000 in interest charges.
Example 2: Credit Card Balance of $10,000 at 20% interest
Now let’s say you have a credit card balance of $10,000 and your interest rate is 20%. If you only make the minimum monthly payment of 2% of the balance (or $20, whichever is greater), it will take you over 30 years to pay off the balance, and you will end up paying over $28,000 in interest charges!
However, if you increase your monthly payments to $500, you will pay off the balance in just over 2 years and save over $23,000 in interest charges.
Example 3: Credit Card Balance of $20,000 at 22% interest
Finally, let’s say you have a credit card balance of $20,000 and your interest rate is 22%. If you only make the minimum monthly payment of 2% of the balance (or $20, whichever is greater), it will take you over 50 years to pay off the balance, and you will end up paying over $128,000 in interest charges!
However, if you increase your monthly payments to $1,000, you will pay off the balance in just over 2 years and save over $115,000 in interest charges.
The numbers don’t lie and I have to say I find these examples crazy to see in real life. Imagine paying almost $130k interest to the bank for buying a holiday, or some clothes on a credit card. We have to ask ourselves, is this kind of spending worth it in the long run??
As you can see from these examples, paying off your credit cards sooner can save you a significant amount of money in interest charges over the long run. Of course, it’s important to remember that these examples assume that you don’t make any additional charges to your credit card while you’re paying off the balance.
If you’re struggling with credit card debt, there are a few strategies you can use to help pay off your balance more quickly. One common strategy is to focus on paying off the card with the highest interest rate first, while continuing to make the minimum payments on your other cards.
Another strategy is to look for a balance transfer card that offers a 0% interest rate for a set period of time and transfer your balance to that card. This can give you some breathing room to pay off your balance without accruing additional interest charges.
I talk about my own journey out of debt (mainly credit card debt) in my podcast episodes, listen here.
As a mortgage broker, I always advise my clients to be mindful of their credit card balances and to make an effort to pay them off as soon as possible. By doing so, you can save a significant amount of money in interest charges and improve your overall financial health. When you’re ready to buy a property, showing the bank that you are a responsible person who can manage debt effectively will set you up well.
If you’d like to see how your numbers stack up for a mortgage or loan, please book a time via my calendar. I can’t wait to meet you and help you on your financial journey!
