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

By Michael Redbourn

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Published: 25Sep2009
Word count: 801
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Many people that have a lot of credit card debt, who suddenly come into some ready cash from the sale of a property, an inheritance, a sport's bet or maybe even the lottery, often rightfully wonder if they can save themselves a bundle by paying off their credit card debts early using 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 being, that credit card companies won't agree to debt settlement unless the debtor owes close to $10,000 and is several months behind on his or her account.

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 $25-30 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 are basically two upsides and one downside to using DMP.

A DMP plan typically spans between 36 and 60 months and the upsides are that the creditors accept a lower rate of interest and will report that your payments are being made on time, but the downside is that your credit cards will either be closed, or suspended until they're paid off.

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.

The advantage of the snowball system is that it provides the quickest way to pay off an account completely, thereby providing a big emotional boost along with 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 similar to the Snowball system, but instead of paying as much as possible off of the account with the lowest balance, you pay the maximum off of the account with the highest interest rate.

But Please Make Sure that You Have A Nest Egg!

Whichever system you choose will be better than no system, but if you do get a windfall, then I'd certainly urge you to set some money aside in case of emergencies.

Emergencies come in all shapes and sizes such as auto repairs, property damage, medical emergencies and legal issues, and just imagine how terrible it would be if you paid off all you debts, hadn't set some money aside, and then suddenly got laid off and couldn't find a job.

The author of this article was a film producer, and award winning film sound editor for many years. He has a passion and a flare for economics, and one of his websites -> Pay Off Debts features a large number of highly popular articles about the world's economy in general, and debts, debt settlement, debt consolidation and bankruptcy in particular.

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