A New Way to Pay Off Credit Card Debt

The "island" approach might work for you, especially if other techniques have failed.

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People are always coming out with quick fixes for tough problems. Take this pill and lose weight. Invest here and make a huge profit, guaranteed. Use this service and cut your debt in half or wipe negative information from your credit reports.

These schemes are why the phrase “it’s too good to be true” became a cliché, and you’re right to doubt them. To quote another cliché, good things don’t come easy. Unfortunately, this is the case for most financial issues. You’re going to have to work hard to get out of credit card debt or attain an excellent credit score. Still, this doesn’t mean there aren’t ways to ease your burden. And as Americans continue to pile up credit card debt, such help can only, well, help.

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Therefore, apply the Island Approach to your personal finances and lower your interest costs, get out of debt and maximize your credit card rewards. It’s not going to be easy, but it will make things easier. The Card Hub Island Approach is built upon the idea that if you isolate your various credit card needs, like they’re on different islands, you’ll be able to lower the cost of your debt as well as instill responsibility into your financial life and maximize your credit card rewards.

Still, since you might be skeptical, why don’t we look into how the Island Approach manages to do so? In all, the Island Approach has six main benefits. It helps you:

1. Learn to live within your means

If you have credit card debt, it must not be on the same card that you use to make purchases because that makes it difficult to gauge whether your everyday spending is at a responsible level. By having one credit card on which you revolve a balance and one for your normal expenses, it’s obvious if you’re spending beyond your means. Ideally, you should already be paying for your everyday purchases in full each month. If you aren’t, definitely make an adjustment. Once you fall into a routine of paying down the balance on this credit card every month, not doing so will be a shock and will serve as a warning that you’re spending irresponsibly.

2. Lower your average monthly balance

Separating your debt from your spending also helps lower your average monthly revolving balance, which is the amount that your interest rate is applied to. Since you never revolve a balance on your everyday expense credit card, it never accrues interest. Only the debt on your other card does. Choosing to make do with a single credit card means that your interest rate will be applied to the sum of your debt and your monthly expenses, and your costs will be greater.

3. Control payment allocation

Isolating different credit needs also ensures that you won’t carry multiple balances on the same card, as would be the case if you transferred a balance to your everyday card. This helps you save money because it allows you to apply monthly payments strategically in order to pay down the balance with the highest interest rate quicker. This isn’t possible when you use a single credit card because the law requires that only the amount of your payment above the minimum goes to the balance with the highest interest rate. And that’s just for personal credit cards; allocation rules are even less favorable for small business credit cards.

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4. Avoid unpredictable debt

Given the information in No. 3, you obviously should not carry multiple balances on your business credit card. In fact, if you’re a small business owner, you shouldn’t carry any balance on your business credit card. Why? Well, because CARD Act rules do not apply to business credit cards, and your interest rate can therefore change at any time and without cause. Therefore, in order to avoid debt surprises, you should use business credit cards only for purchases that you will pay for in full by the end of the month in order to take advantage of their business-oriented rewards and tracking capabilities.

5. Garner the lowest possible interest rates

You can get a pretty low interest rate on a single credit card, sure. But can you get the lowest purchase APR, the lowest interest rate for balance transfers and the lowest regular rate? Not on any one credit card. However, if you get multiple credit cards, you could, of course, gather this collection of credit card attributes.

6. Maximize credit card rewards

This also holds true for credit card rewards. Odds are, you can find a card with a pretty good rewards program. But, can you find one with the best cash back rewards, the best airline rewards, the best hotel rewards, the best rewards on gas purchases and the best rewards from your favorite store? In short, no. So, if you’re debt-free and you pay your credit card bills in full each month, assemble the best collection of rewards credit cards in order to create a comprehensive package that fits your spending and lifestyle needs.

Like I said, the Card Hub Island Approach is not a quick fix. It requires effort and discipline on your part, but if you apply it to your personal finances, the results will be undeniable.

Odysseas Papadimitriou is chief executive and founder of CardHub.com, a website that helps consumers learn about and compare the best credit card deals.