Welcome To The Ovation Credit Services Blog

So you want to pay off your debt and want to know the best way to go about it. Our Tools page lists seven ways: Minimum Payments Only, Minimum Payments With Snowball, Lowest Balance Paid First, Highest Balance Paid First, Highest Interest Paid First, Split Discretionary Evenly, and Bimonthly Payments.

Which is best? As in most things, it depends on your situation and your budget. You have to ask yourself what’s more important: the morale boost of a quick payoff, reduced interest payments, the satisfaction of paying off a large balance, or the stability of a well-defined payoff schedule?

Lowest Balance Paid First is the best choice for a number of reasons.  First, if you’ve run up a large debt across several accounts, you’re likely to be over-extended. And that means that your discretionary cash (money you have remaining after making minimum payments on your debt, paying your monthly bills such as rent or mortgage, utilities, and insurance, and paying for food, incidentals, and entertainment) is likely to be somewhat limited.

However much it is, applying your payment to the lowest balance first has a multiplying effect because it’s a significant percentage of the total owed. That added amount, when combined with the minimum amount, will drive the debt’s balance to zero relatively quickly. Just be careful that you don’t add to that debt or add to your debt in a different account. Sticking to the plan and actually paying off that first card will give you a huge morale boost, as will adding the now freed up money to the next lowest balance.

Suppose your lowest balance debt is $2,000, the interest rate is 14% and the minimum monthly payment is $75. According to the payment schedule on the Tools page, your last payment will be January 2015, and you’ll pay $410 in interest. Now suppose you can pay an additional $50 a month. Your last payment will be October 2013, and you’ll have paid $227 in interest, a reduction of $183. You now have $125 to add to your monthly payment on the lowest balance of your remaining debt, and you haven’t needed to make any additional changes to your budget.  As a bonus, you begin paying that down 15 months sooner.

Lowest Balance Paid First is a great tool for managing your credit debt. Your choice may be different depending on your situation. Whichever tool you choose, keep in mind that your primary focus should always be to eliminate your debt.

It is ironic that the items we desire most are consistently the most expensive on the store shelf. Coincidence? Not really. Companies spend thousands of dollars researching exactly which items consumers are most willing to spend their hard-earned cash on. Even without their fiendish advertising ploys, we find ourselves submitting to the newest trend of cars, televisions and other expensive products in the attempt to satisfy our craving for new things.

We all feel the urge to make purchases that we either do not need or are not financially ready to afford. However, the credit card industry (a willing and able partner of the retail industry) has made it all too easy to drown ourselves in debt. Using a credit card to make large purchases is one of the biggest mistakes people make, yet it happens all the time. The drive for instant gratification often overshadows the practicality of refraining from using the credit card, but there are several reasons as to why paying with cash is the best decision in the long run.

Making large purchases with your credit card only make you more susceptible to the fees and extra costs associated with credit card use. Any time you purchase an item with a credit card, there is interest that must be paid as well, making the item more expensive than it would have been if paid for with cash. That interest only increases with time, and the larger the purchase, the longer it takes to pay it off. A continually high balance on a card can easily ruin your credit and reduce your purchasing power in the future. Large purchases also risk pushing you over your spending limit, and over-the-limit fees are unforgiving.

You can have the items you desire without the mess and stress of credit problems, by simply planning ahead. Making a large purchase with cash not only protects you from any random fees or blows to your credit, but choosing to use cash also gives you the time to research the purchase and make sure you are getting the right model, style or version you need. Paying with cash is also proof that you are financially capable of purchasing the item, because handing over a wad of cash, knowing full well that there are bills to pay and your cupboards are empty, is much harder to do than sliding a piece of plastic through a machine. Cash is tangible and can force you to consider the necessity of your purchases.

Credit can be a powerful tool. However, large purchases enter the danger zone of credit spending. The simplicity of cash creates a platform in which planning and prioritizing can take place. This allows you to curb impulse, stick to your budget and maintain good credit.

If you are considering a large purchase, take the first step and put down the credit card.

Wages are stagnant and unemployment rates are hovering near all-time highs, while food and fuel prices continue to rise faster than ever. Managing money well enough to maintain your lifestyle – or even well enough to pay for necessities – is more challenging than ever. In a perfect world, we would have a three to six month stash of emergency money we could use to help bridge the gap.  In the real world, emergency funds are already depleted and few additional options exist.

In the real world, your credit card has become your emergency fund.

As you consider ways to modify your spending habits, you may find a few extra dollars each month to spare. The desire to establish or maintain an emergency fund clashes with the desire to pay down or pay off your credit card. With a cursory glance at interest rates, the choice to pay down the credit card takes priority over establishing or maintaining an emergency fund.

The use of a credit card demands that you pay the bank for the privilege of having access to the money on your balance. You’ll pay close to 15% interest, even if you have a good credit rating.  On the other hand, interest rates for savings accounts and CDs are minimal compared to the interest rate that you will pay for revolving credit.

When you consider how much extra you will pay a bank for access to their plastic emergency fund compared with how much a bank will pay you to give them access to your savings, the smart money is in paying down your credit card balance.

The money you save in credit card interest over time can be used to maintain an emergency fund on your own terms. Alternatively, you may choose to allocate a larger percentage of your disposable income to paying off your credit card balance, while allocating the smaller percentage to your savings (our tools can help).

As you structure your finances to improve your long-term security, consider other smart money decisions: While you pay down your credit card balance, track your credit card spending, utilizing text messaging and statement features to keep you informed and aware of where, when, and how often you are using your credit card. As well, examine your spending habits in general.

You may be in the habit of purchasing a latté on the way to work each morning. While the daily cost may seem trivial, calculating the weekly and monthly total for this daily indulgence essentially leaves you with an extra monthly bill.  Consider taking a thermos or travel mug with you to work. With that thought in mind, think about packing a lunch instead of ordering a take-out lunch or frequenting the local deli.  The savings will add up in your favor.

You cannot control how the market will respond to economic changes, but you can control your response to economic fluctuations. You cannot control rising prices and interest rates, but you can control your spending habits, and you can make smart choices with your money.