Advice on Using a Windfall to Pay Off Credit Card Debt

Written by , March 27, 2012

Advice on Using a Windfall to Pay Off Credit Card DebtNot all unexpected financial developments are bad things. For example, you may find yourself the recipient of a cash windfall. A windfall can come from a number of different sources, including larger than expected tax refunds, inheritances or even winning a contest or sweepstakes.

Since a windfall is not money that you planned on receiving, the amount won’t already have a place within your budget. This means that you have options for what to do with the money. You could spend it all on indulgences, of course, but there are more productive uses that you should consider first. One great option is to use the windfall to pay down – or even completely pay off – your credit card debt.

Here is some credit card advice on what to do if you are lucky enough to score a cash windfall.

  • Save on Interest Charges. Reducing your total credit card debt can help you save a significant amount in interest charges over the long run. For example, if you have a credit card that charges interest at a 20% rate, then paying off just $5,000 of the balance can save you $1,000 a year in interest charges. If you tend to carry a credit card balance for a long period of time, the savings can be substantial.
  • Free Up Cash For Other Things. When your credit card balances are lower, you won’t need to pay as much each month in interest and/or to reduce the principal debt. This means that you’ll have more cash each month in the future available for other things. When you’re paying less to the credit card companies, you’ll be able to save more towards retirement, a college fund for your children, your “rainy day” fund or perhaps all of these things.
  • Improve Your Readiness for a Financial Emergency. By paying down your credit card debt, you’ll have more of a cushion available in your emergency fund in the event of a financial emergency. When you’re balances are low, you can charge or get a cash advance for a greater amount if you absolutely need the money. (Of course, you’ll want to access your “rainy day” fund before you borrow for a financial emergency, but sometimes even that fund will not be enough.)
  • Improve Your Credit Score. Finally, using a windfall to pay down your credit card debt will improve what is known as your “credit utilization” ratio. This ratio compares the balances of all your credit cards to the total credit limit of those cards. Having a high credit utilization ratio means that you are using much of your available credit – and this tends to lower your overall credit score. By lowering your ratio, you will improve your score and make it easier to obtain more favorable rates when you borrow for big ticket items like a new car or a home purchase.
  • You might decide to take a small portion of your windfall to treat yourself to something extravagant, but don’t pass up the opportunity to greatly help your overall financial situation by using most of those funds to pay off your credit card debt.

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