We all do it at one time or another--spent more than we should on a big shopping spree, an expensive holiday getaway or hard-to-get season tickets for the local team. But even if you enjoy the splurge, it’s no fun when you check your credit card statement at the end of a month and realize that you’ve got a big bill to pay.
You’ve got a few choices: paying off the bill all at once, making larger payments for few months until the debt is gone or paying just the monthly minimum balance. While there are pros and cons to each approach there is one that’s definitely better than the rest.
There are a lot of advantages to paying off a big balance right away. For one thing, you won’t be throwing away money on interest charges by extending your payments out. (Wouldn’t you rather keep that money and spend it on yourself?)
Getting rid of the debt could also improve your credit score, or at least keep it where it currently is. Lenders like to see a fairly low credit utilization rate--the amount that you’ve borrowed (including credit card debt) as opposed to the amount of money that you could borrow. When you pay off a loan all at once, you’re not taking on more debt, so your credit utilization rate won’t go up because of that big-ticket purchase.
While this is the ideal approach, it may not be the best one for your situation. It’s not a good idea to borrow from your emergency fund; what happens if your car needs expensive repairs next week and you’ve left yourself without the money to get them done? Same goes for long-term savings; it’s easy to borrow from that, but often very hard to exercise the self-discipline to pay that money back. And once you’ve decided to take money out of your savings or retirement, it’s easier to do it again and again.
If you don’t have enough money to make one big payment, try paying off your credit card bill in just a few big installments. The sooner you can do it, the faster you can stop paying interest. Try cutting back on your regular spending so you’ll have more money to put towards getting your credit card balance back down to zero.
This is never a good option, whether you debt is small or large. Suppose you had a zero balance on your card, spent $3,000 on your splurge and now plan to make the minimum monthly payments on that card. At 18 percent interest--the low end of the scale today--it would take you 18 ½ years to eliminate your debt and you’d pay almost $4,000 just in interest. You’d be more than doubling the cost of that one-time overspending. Plus, that’s assuming that you don’t rack up any more charges on that card. Add to your balance, keeping paying only the minimum balance and you could end up deeply in debt and with a less-desirable credit score because of a high credit utilization score.