Paying down credit-card debt is one of the biggest financial challenges Americans face. Everyone wants to pay down cards in full every month, but many people can’t.
The numbers are very steady: for every 100 “transactor” credit cards that are paid off in full every month, there are about 150 “revolver” credit cards that carry a balance, and almost always charge painfully high interest rates. Americans now have some $920 billion outstanding in revolving credit—that’s an all-time high, and has risen by almost $30 billion this year alone.
As such, the standard personal finance trope of “pay off your credit cards in full every month” is not particularly useful advice. If you’re one of the millions of people who can’t pay off your credit cards in full every month, what are you supposed to do?
A new service called SimplyCredit might be able to provide some relief. You link all of your credit cards to the site, as well as your checking account. Then, SimplyCredit goes ahead and pays off your cards in the smartest possible way.
First you set how much money you need in your checking account at all times—a minimum of, say, $1,000. Then, you set the amount you can put toward credit card payments each month. Let’s say that’s $300. And let’s say you have four different credit cards, all with different balances and interest rates. SimplyCredit will work out how to divvy up that $300 according to one of two different algorithms: it will either try to minimize the amount that you’re paying in interest, or else it will try to maximize your credit score.
So if you check your account, you’ll see something like this:
In this example, the algorithm is prioritizing credit score over costliness. The Target card is getting the biggest payment because it’s 65% of the way to being maxed out, and a high utilization rate hurts a credit score. If the algorithm were set to minimize interest charges instead, it would throw a bunch of money at the Gap card, which has the highest interest rate.
For those with decent credit—If your credit score is above 660, and you’re not delinquent on any loans—SimplyCredit can also act as a lender to save money on interest charges. If you opt into that service, SimplyCredit will open up a line of credit and use it to pay down all your present and future balances.
SimplyCredit doesn’t guarantee a lower interest rate; the rate it charges depends on its assessment of your worthiness as a borrower. And you certainly shouldn’t take out a loan from SimplyCredit if the rate they offer is higher than the rate you’re paying on your credit cards. But SimplyCredit’s loan is much friendlier than the ones you have from credit-card lenders. For one thing, it charges interest only from the day that the balance is paid off, rather than from the day the purchase is made. And for another, SimplyCredit only charges “simple” interest, rather than compound interest, which means that you only pay interest on your purchases, rather than on the entire balance of the loan.
SimplyCredit launched less than a year ago, so it’s hard to say how successful the company will be, how its business model will evolve, or whether it will do what it claims to be able to do for consumers. There are also risks involved with handing over so much of your personal financial data to this site, just like any other.
But SimplyCredit is doing something interesting in that its very existence is based on helping consumers pay down credit-card debt in the smartest and easiest possible way. That’s how it makes money and that’s what it promotes. And it’s something banks that lend money through credit cards have no incentive to do, because the more debt consumers accrue on their cards, the more money lenders make. The more difficult it is to understand the best way to pay them down, the less likely consumers will do so.
“We don’t love credit cards, but we don’t hate them either,” says SimplyCredit co-founder Karthik Sethuraman. “We make people responsible by first getting rid of the craziness that credit cards come with.”
SimplyCredit won’t do the hard work for you by helping you spend less, or forcing you to live within your means. But it does make the aftermath of that spending a little easier. So if you’ve decided that your credit card debt is too high, and needs to come down—or even if you just need a bit of help working out how much money to pay on each card, each month—then SimplyCredit could be a good place to start.