Credit Cards

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

EPF Last Update: May 22, 2020

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 these money.
  • And other…

And many people continue to applying for more credit cards.

Do you know that our study reveals that the average numbers of credit cards that Americans have, increased from 2,5 to 4. That is a huge difference. The trend in people to have 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 are not your. This feeling put a lot of Americans in debt!!! Many studies reveal a strong correlation between the saving habits of the people and the number of credit cards that people have. Think on that! In some cases, it should be better that you have no credit cards and try other solution to your unexpected financial situations.
  • The risk of debt! Spending money that are not your something can exceed the limit. One day this puts you in a debt.
  • Increase of your risk factor. Many lenders consider more credit lines for high risk.
  • Paying high fees because of wrong managing of the 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 loses!

Like we said $1 lose could lead to $1,000…

Even that’s not correct!

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

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

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 make sense.

The constant lose of fees, in a relatively long period of time could lead to serious loses! 

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

Today we are going to 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. But, in fact by understanding the thing deeper, you get some experience that will help you make better and better financial decision one day! Trust us!

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

Many people misinterpret this in a 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 fee, $30 minimum.
  • $1,000 limit, 3% interest fee, $30 minimum.

Let’s also say, that you have spent the full limit to both of them. Now you have some money and ask yourself where to fund these 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 continue to raise; 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 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 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 1% limit, here is what would happen:

On the credit card that is with 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 relatively low amount. How much you would lose, if the amount was $1,000? How much you would 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 …

There are also many people who try to play this strategy the wrong way. They lose money again.

The main problem is that they misinterpret the rule: “Pay More Where is More Expensive” in a wrong way.

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% are actually 75%.

And they load 75% of their money in the card that is with 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 that is with 3% interest fee.
  • 25% of $100, which is $25 in the credit card that is with 1% interest fee.

Now let’s count the loses.

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 interest. You lose money again. Let’s count how much.

These $100 will be split by $50 in each credit cards.

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

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

Now let’s count the loses.

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

There are people who 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 can credit cards with different interest, load all funds in the one that is the most expensive.

In all other credit cards load only the minimum.

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

How to Fund Credit Cards with Different Limit?

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, the things change.

Example:

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

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

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

On the credit card that is with 1% interest fee, you would pay: ($1,000 – $100) * 1% = $9.

On the credit card that is with 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 $100 limit.

On the credit card that is with 1% interest fee, you would pay $0, so you pay $1,000 * 1% = $10.

On the credit card that is with 3% interest fee, you would pay $100, so you would pay: $0 in interests, 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, in all of these examples we skip many things like hidden fees, minimum monthly payment and so on. These things would change the things.

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 these money in each credit card.
  • Pick the lowest loses.

That is.

But …

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

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

Well, like we’ve mentioned before, you should try to do this manually. There is nothing bad in using a free calculator, but do these things also 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 understand 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 fee, $30 minimum.
  • $1,000 limit, 3% interest fee, $30 minimum.

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

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

When People Shouldn’t 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 credit cards that are more expensive.

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

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 in the card.

  • The credit report problem

Again, if you pay the minimum on your credit card, there shouldn’t be any problem with your credit report. But having a card with too high debt generate 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 with 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.

  • In addition

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 have approved you but for other card with not so good parameters like amount, APR, rewards and so on.

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 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 in an appropriate way, Citi would approve you easy for your desired credit card soon, even if you don’t qualify for all of their requirements!

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