The Pros And Cons Of Paying Off Credit Cards With A Lump Sum

Written by admin on December 6th, 2010

Lots of people that suddenly come into some money from an inheritance, the sale of a property, the lottery or a bet etc. ask themselves if they can save a lot of money by paying off their credit card debts with a lump sum.

The simple answer is “yes” of course they can save a lot of interest by paying of their cards in full, but they can’t go the debt settlement route, which means paying less than they actually owe without affecting their credit ratings.

The reason for this is that credit card companies won’t enter into a debt settlement agreement unless the debtor owes around ,000 and is also several months behind with his or her payments.

Causing your accounts to become delinquent is what causes the decline in one’s credit rating of course, but if your accounts are already delinquent then it it’s not something that should overly concern you.

If a credit rating has already been shot to pieces, then it wouldn’t be affected too much, whereas if it’s a stellar one, then it would fall to earth with a resounding crash.

If your accounts are not delinquent however, then you’ll also need to consider that along with the drop in credit rating, that there will be penalties, and the inevitable phone calls and knocks on the door from debt collectors.

It’s said that knowledge is power, so if you’ve got money to pay off your debts, or even if you haven’t, then a visit to a debt counselor would be a good step to take, because if the agency is a BBB (Better Business Bureau) affiliated one, then advice will be close to free, and we’re talking about -30 after which you should leave the counselor’s office with a much better idea of what you need to do.

You might be told that a DMP (Debt Management Plan) would be an option, and a DMP is basically a workout agreement with your creditors, set up by a credit counselor or debt settlement expert.

The basic idea behind a DMP is that you make one monthly payment to an agency, which then distributes a pre-agreed amount to each separate creditor, and if you go this route then only go down it with a reputable BBB affiliated debt settlement company, most of whom will give you a free consultation.

There’s essentially one downside and two upsides to using a DMP.

A DMP plan is most often set up for a period of between 36 and 60 months, and the downside is that your cards will either be cancelled or suspended in the interim, but the upsides are that you’ll pay a lower rate of interest and your payments will be reported as getting paid.

In the event that you decide to pay off the debts on your own instead of using a debt settlement company or a credit counseling agency, then here are the three most common ways of doing it,

1) Constant Payments On Every Account

The minimum amount that a credit card company requests as a minimum payment will get less every month as your balance is reduced, but the constant payment on every account system means that you continue to make the same payment every month even though the requested amount gets less and less. It’s the simplest system, but also the least financially effective of the three.

2) The Snowball System

This system is very popular and very effective, and what you do is to pay the minimum monthly payment on all your accounts, with the exception of the one with the lowest balance, and you pay the most that you possibly can off of that account.

Probably the biggest advantage of the snowball system is that it provides the fastest way to pay off a single account completely, thus giving a big emotional boost in addition to the financial savings.

3) Debt Stacking

This system is undoubtedly the one that works best financially, and if you don’t need the emotional boost that the Snowball provides, then it’s the one that you should use.

It’s very similar to the Snowball system, but you pay the maximum that you can off of the card with the highest interest, and not the one with the lowest balance.

But Please Make Sure that You Have A Nest Egg!

Regardless of which system you decide to use it will be far better than not using a system, but if you do suddenly come into some cash then I’d really recommend that you reserve some of it in case of an emergency.

There are lots of different emergencies that can arise, and they come in all shapes and sizes, a medical or legal issue, a major auto repair, property damage etc. and just imagine what it would be like if you’d used all you cash to pay off debts, and then got laid off and couldn’t find a job.

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