How a Lost of Only $1 Can Lead to More than $1,000 in Loses, if You Don’t Manage Your Credit Cards Correctly?

ElitePersonalFinance
Last Update: February 13, 2021 Credit Cards Save Money

Having multiple credit cards has a lot of advantages, but also a lot of disadvantages.

The advantages are:

  • You have money on the side.
  • You don’t pay any interest, in case you don’t use this money.
  • And others…

And many people continue to apply for more credit cards.

Do you know that our study reveals that the average number of credit cards that Americans have, increased from 2,5 to 4? That is a huge difference. The trend in people having more credit cards is obvious.

But there are also many disadvantages.

And typically, people who get credit card after credit card don’t think about them…

The main disadvantages are:

  • The feeling that you can use money that is not yours. This feeling put a lot of Americans in debt!!! Many studies reveal a strong correlation between people’s saving habits and the number of credit cards. Think about that! In some cases, it should be better than you have no credit cards and try another solution to your unexpected financial situations.
  • The risk of debt! Spending money that is not your something can exceed the limit. One day this puts you in debt.
  • Increase your risk factor. Many lenders consider more credit lines for high risk.
  • Paying high fees because of the wrong management of your credit cards.

While the debt related problems are much more serious, we can’t ignore the problem of overpaying extra fees. In fact, not managing your credit cards correctly could lead to serious money losses!

Like we said, a $1 loss could lead to $1,000…

Even that’s not correct!

Because a $1 loss could lead to much more than $1,000.

Many Americans lose a lot of money because they don’t count their losses correctly.

And this is what all banks want!

At first sight, it looks like you lose only $1 on one card, then only $3 on another card. Who cares about so little money? No one. And here is the mistake.

Because, if you repeatedly continue losing money in credit card fees, one day you will find that the number will become huge.

One day this amount would become $10, $30, and then $100, $300, and then $1,000 and more.

That makes sense.

For a long period of time, the constant loss of fees could lead to serious losses! 

Even if you don’t use your credit card regularly and the losses are low, why shouldn’t you start calculating your credit card debt in the right manner now? Why pay some extra fees to banks for NO reason?

Today we will teach you exactly how to manage your credit card debt, so you lose nothing!

And it’s very easy!

How The Snowball Debt Plan Works?

We are sure that most of you know about the snowball debt repayment plan.

But do you use it? Do you use it correctly?

Many people don’t … and they lose money.

Today we are going to teach you how to use it manually.

But why? There are so many free snowball calculators.

You should use calculators. But trust us – do it also manually! And you will be one step away from managing your full finances better.

At first sight, it looks like you waste time. In fact, by understanding the thing deeper, you get some experience that will help you make a better financial decision one day! Trust us!

The easiest way to explain the snowball is – put more money where you have more losses.

Many people misinterpret this in the wrong way and lose money.

We will explain this now.

How to Fund Credit Cards with Same Limit and Different Interest Rate?

Let’s say you have two credit cards:

  • $1,000 limit, 1% interest rate, $30 minimum.
  • $1,000 limit, 3% interest rate, $30 minimum.

Let’s also say that you have spent the full limit on both of them. Now you have some money and ask yourself where to fund this money.

The answer.

Task one will be to pay all of the minimums on the credit cards! So you build trust in your lender; your credit score continues to rise; you avoid extra problems like penalty fees.

Now, let’s say that after you pay the minimum to both of your credit cards, you have $100. And now the question is where to put them?

Put all of them in the more expensive card! No other way!

Let’s prove that.

The right way!

If you pay $100 to the card that is with a 3% limit, here is what would happen:

On the credit card that is with 1% interest fee, you would pay:

$1,000 * 1% = $10

On the credit card that is with a 3% interest fee, you would pay:

$900 * 3% = $27

Total interests: $37

The wrong way!

If you pay $100 to the card that is with a 1% limit, here is what would happen:

On the credit card that is with a 1% interest fee, you would pay:

$900 * 1% = $9

On the credit card that is with 3% interest fee, you would pay:

$1,000 * 3% = $30

Total interest fee: $39

The difference is only $2, but this is what you would lose per month! Ant it is counted per $100, which is a relatively low amount. How much would you lose if the amount was $1,000? How much would you lose if you constantly use a wrong strategy month after month? This amount will become huge. And many people even don’t understand this problem in time. But some of them would understand that one day and then …

Many people try to play this strategy in the wrong way. They lose money again.

The main problem is that they misinterpret the rule: “Pay More Where is More Expensive” wrongly.

Loses in Case The Amount is Split Based on The Ratio Between the Interest

Some people go that way:

1% + 3% = 4%

If 4 is 100%, then:

1% is actually 25%

3% is actually 75%

And they load 75% of their money in the card, which is a 3% interest fee.

Here is what they actually do:

The amount that they have of $100 would be loaded that way:

  • 75% of $100, which is $75 in the credit card,  or 3% interest rate.
  • 25% of $100, which is $25 in the credit card, or 1% interest rate.

Now let’s count the losses.

On the credit card that is with 1% interest fee, they would pay:

($1,000 – $25) * 1% = $9.75

On the credit card that is with 3% interest fee, they would pay:

($1,000 – $75) * 3% = $27.75

Total interest: $37.5

So you lose $37.5 – $37 = $0.5

Loses in Case The Amount is Split Equal

Pay the same amount to every card, even if they are with different interests. You lose money again. Let’s count how much.

These $100 will be split by $50 on each credit card.

The amount that they have of $100 would be loaded that way:

  • $50 in the credit card that is with a 3% interest rate.
  • $50 in the credit card that is with a 1% interest rate.

Now let’s count the losses.

On the credit card that is with 1% interest fee, you would pay:

($1,000 – $50) * 1% = $9.50

On the credit card that is with 3% interest fee, you would pay:

($1,000 – $50) * 3% = $28.50

Total interest: $38

So you lose $38 – $37 = $1

Some people probably do other more complicated types of counts, but the same thing will happen – they lose money.

If you don’t want to lose money, think that way!

If you have credit cards with different interests, load all funds in the most expensive one.

In all other credit cards load only the minimum.

When you pay in full the most expensive credit card, move on to the next one and repeat that till you pay all of them!

How to Fund Credit Cards with Different Limits?

In the previous example, we explained how this strategy works if the credit card limits are the same. Ok, but if they are not the same, things change.

Example:

  • $1,000 limit, 1% Interest rate, $30 minimum.
  • $100 limit, 3% interest rate, $3 minimum.

And now, let’s say that you plan to load $100, and you are thinking about which credit card to put them.

Here is what would happen if we load the card with a $1,000 limit.

On the credit card that is with 1% interest fee, you would pay:

($1,000 – $100) * 1% = $9

On a credit card with a 3% interest fee, you would pay $0, so you would pay:

$100 * 3% = $3

Totally you pay $9 + $3 = $12

Here is what would happen if we load the card with a $100 limit.

On a credit card with 1% interest fee, you would pay $0, so you pay:

$1,000 * 1% = $10

On a credit card with a 3% interest fee, you would pay $100, so you would pay:

$0 in interest because you fund it in full

Totally you pay: $10 + $0 = $10

In this example, we see that, even if the credit card is with higher interest rates, we still lose money if we load it because the limits are different.

Note that we skip many things like hidden fees, minimum monthly payment, and so on in all of these examples. These things would change.

How Actually to Manage Many Credit Cards with Different Limits and Interests?

The best way actually is very easy.

  • Decide how much money you have.
  • Find out how much you’d lose if you fund this money in each credit card.
  • Pick the lowest losses.

That is.

But …

If things become more complicated, the best way would be to use a snowball calculator.

Why You Teach Us How to Count This Manually in Case There are Free Calculators?

Well, as we’ve mentioned before, you should try to do this manually. There is nothing bad about using a free calculator, but we recommend counting these things manually.

Starting to think about your finances is a great exercise that will help you understand and manage your finances in time.

One day you will understand how important is this.

Here is another strategy by Finder.

Should I Do a Balance Transfer between My Credit Cards, Using This Strategy?

Definitely! If you’ve understood your mistake today, do a balance transfer from the cheapest to the more expensive card now. And save some money.

We are back on our example.

You have two credit cards:

  • $1,000 limit, 1% Interest rate, $30 minimum.
  • $1,000 limit, 3% interest rate, $30 minimum.

Now, you’ve spent $500 on each of them.

So, go and fund the remaining $500 from the cheapest card the more expensive now!

When Shouldn’t People Use The Snowball Strategy?

The snowball debt strategy has been created to save you as much money as possible. And it works!

But there are cases when you shouldn’t use it.

  • The problem with the lenders’ trust

Say that you’ve spent the full amount on some of your credit cards, and now you pay only the minimum on it because you fund other more expensive credit cards.

Technically there is nothing bad in this! If you pay your minimum, your lenders should be ok, because they get what they want.

Also, there wouldn’t be any marks on your credit report because you don’t have any late payments.

But this is something that not many lenders would like. If you plan to continue working with this lender in time, if you plan to apply for better credit cards or for a limit increase, you should try to pay more than a minimum.

Lenders would like to see that you pay more and more on the card.

  • The credit report problem

Again, if you pay the minimum on your credit card, your credit report shouldn’t have any problem. But having a card with too high debt generates a debt to income problem. A debt to income ratio is one of the main lender criteria. That’s why you shouldn’t leave credit cards that are always full of debt. Even if you lose some money by not applying the snowball strategy, you should load more than a minimum.

We recommend that you don’t use more than 30% on each of your credit cards.

  • Besides

Say that you are a Citi fan. You’ve found a great credit card, you’ve applied, but you’ve been denied because of your low credit score.

Citi has approved you but for other cards with not so good parameters like amount, APR, rewards, etc.

For this reason, you have applied for more credit cards. And now you have them.

But, you still like the Citi credit card, and you plan to work to get it.

Pro tip:

Work on this credit card more, even if it is with the worst parameters, and you lose some money for a certain period of time!

Why?

Because by proving to Citi that you manage the credit card in a great stand, you are much more close to the desired credit card from them!

Build trust with your best-preferred lenders!

And this will pay very soon.

If you pay this credit card on time, if you use it properly, Citi would approve you easy for your desired credit card soon, even if you don’t qualify for all of their requirements!

MEET THE AUTHOR

ElitePersonalFinance

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