A small payment increase can make a big impact on your debt.
Anyone juggling debt knows the temptation to hand over just the minimum payment stated on a monthly credit card bill. But if you foresee a debt-free future, this plan is not the right course. Pay slightly more than the minimum and you’ll break free from debt much sooner.
For the creditor, minimum payments mean maximum profits. The less you pay, the longer you extend your payback period and the more you pay in interest. Most credit card providers require a minimum payment of only 2 percent; some will ask for up to 4 percent or more. Because the 2 percent minimum is variable, your monthly minimum payment decreases with your debt. That may sound like great news, but it actually slows your payback process even further.
How slow? Say you use a new credit card to purchase a sofa for $2,000 at 17 percent, the current average annual interest rate for credit cards, according to Bankrate.com. Pay just 2 percent each month, and it will take you 256 months to pay off the balance. That’s more than 21 years. What’s worse, you will wind up paying an additional $3,600 in interest for a sofa that’s probably long gone by the time you’ve finished paying for it.
Of course, the optimal strategy to get out of debt is to pay as much as you can as soon as you can. But when money is tight and the minimum is nearly all you can manage, here are two strategies to decrease your debt load more quickly:
Stay with today’s minimum. Stick with a flat monthly rate based on your most recent minimum payment. Using the sofa example above, your initial minimum payment would be $40. Instead of decreasing that payment over time, continue to pay $40 each month. You will be out of debt in 88 months (a little more than seven years) and pay $1,503 in interest. And you may still have a sofa to sit on.
Pay just $10 more. If you can scrape together an additional $10, you’ll make even more of an impact. What difference can $10 make? If you pay a flat $50 per month for the sofa and maintain it over time, you will be out of debt in five years and out just $972 in interest charges.
If you have many credit cards, it may be easier to focus your debt-reduction efforts on one card at a time. Pick the one with the highest annual percentage rate. Pay a little extra to that creditor each month, while sticking with minimum payments on other cards.
- How To Choose A Debt Relief Program (nationaldebtrelief.com)
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- Are Debt Consolidations Loans The Best Way To Get Out Of Debt? (nationaldebtrelief.com)
- The Science of Debt Repayment (abraham-thinkin.com)
- Credit Card Debt Relief Options – A Comprehensive Summary for 2013 Just Released (virtual-strategy.com)