Paying off credit card debt is one of the most common New Years' resolutions, and for good reason. Credit card interest is expensive, and making only the minimum payments on a substantial credit card balance could mean that it won't be fully paid off for decades.
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If you want to pay off your credit cards and find yourself getting tempted to go on a shopping spree, here are three reasons to stay the course and make 2015 the year you finally rid yourself of credit card debt.
Your credit score will improve
As you pay down your credit card debt, you'll find that your credit score will improve significantly. For those of you who monitor your credit score frequently, this could be an excellent motivation to pay down as much as possible.
Thirty-percent of your FICO credit score comes from "amounts owed", which, among other things, takes into account the total amount of your credit card debt relative to your available credit, or your "utilization ratio". For example, if your credit card limits add up to $10,000 and you have outstanding balances of $2,000, you are using 20% of your available credit.
In order to maximize your credit score, you want this to be as low as possible, but many experts say that using 30% of your available credit is the "sweet spot" below which you'll really start to see your score improve.
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So if you are currently using more than 30% of your available credit, focus on getting your debt paid down to this level (or less). And if you are already below 30%, keep going. In my personal experience, I can tell you that your credit score should be maximized with a utilization of 1%-10%.
You'll be able to borrow more
If you apply for a mortgage, car loan, or any other form of loan, the lender generally verifies that you'll be able to comfortably afford the payments.
For example, with a mortgage loan, your debt-to-income ratio is generally expected to be below 36%. In other words, when you add up the monthly payments on all of your debts (including your expected mortgage payment), the total should be less than 36% of your income.
As you pay down your credit cards, your monthly required payments should drop, especially if you have relatively high balances. And, once your debt is paid off, your required monthly payments will be zero. This will reduce your total debt payments and could definitely work in your favor when trying to buy a house or car.
It may not seem like it, but your credit card is cheap right now
Perhaps the best reason to hurry up and pay your credit cards is that the current low-rate environment won't last forever. But isn't your interest rate already pretty high?
Well, yes, but believe me, it could get much higher. The majority of credit cards have adjustable interest rates (check your cardholder's agreement to see if this applies to you), meaning that they adjust with the prime rate. So although your credit card's interest rate might be high when compared with, say, a mortgage or auto loan, they are about as low as they are going to get right now.
Most experts agree that the Federal Reserve will finally begin to raise interest rates in 2015, and when they do, you can bet that your variable-rate credit cards will go up as well.
Make it a priority
There are definitely good reasons to have credit cards. For starters, it can be nice to have access to a large amount of money if you need it to cover an unforeseen expense. And if you use credit cards frequently but pay your bill in full every month, you can earn some very nice rewards at little or no cost to you.
However, paying lots of interest to credit card companies is a major drain on your wallet and overall financial health. If you have been carrying a balance on your credit cards, make 2015 the year you finally change that.
The article 3 Reasons to Finally Pay Off Your Credit Cards in 2015 originally appeared on Fool.com.
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