Credit card debt: Breaking free of the minimum payment trap
If you pay your credit card bill month after month but the balance never seems to budge, you may have fallen into the minimum payment trap. Luckily, it doesn’t take much to break out of this trap and start reducing your credit card debt.
The truth about minimum payments
Minimum payments are the bare minimum amount you’re required to pay each month on your credit card bill. This is typically a small percentage of the balance. In some cases, minimum payments can actually be useful. If you find yourself in a financial bind, a small minimum payment for a short period can help you through while still fulfilling your financial obligations.
Minimum payments are tempting when money is tight or there are other things you want to purchase. Falling into this minimum payment trap will keep you in debt for as long as possible. The reason behind this is simple—the longer it takes you to pay off your credit card debt, the more money the card companies make in interest.
Thanks to the Credit CARD Act of 2009, which was enacted to protect credit cardholders, credit card companies are now required to be more transparent about the cost of credit card debt. Now, all statements are required to include how long it will take you to pay off your balance when paying just the minimum amount.
This information helps you see the true cost of paying the minimum and can motivate you to action.
A little goes a long way
Credit card debt can be overwhelming, but you’d be surprised how far just a few extra dollars a month can go. Consider the following example: your credit card has a $1,500 balance and a 20 percent interest rate. By paying the minimum payment each month, it will take you 13 years to pay off the balance. During that time, you’ll pay $1,890 in interest, more than doubling your original balance.
However, paying just $5 more a month will bring you to a $0 balance in just four years, a whopping nine years earlier than if you paid the minimum payment. You’ll also pay $707 in interest, saving over $1,100. Use a calculator like the one here to see how much different amounts can save you in both time and money.
Going beyond minimum payments
Paying more than the minimum payments may seem difficult if you have a lot of credit card debt or if your budget doesn’t allow much wiggle room. Use these tips to help you free up some cash and pay down your debt:
- Don’t incur more debt. Adding to your current debt load will only prolong the amount of time it takes to pay off your credit card debt.
- Make a budget. An honest budget will help you see where your money is going each month. Oftentimes, people find that they’re spending more than they think. Once you make a budget, stick to it.
- Look for places to cut expenses. Your budget will help you find places you can save money. Put the money saved towards your credit card debt.
- Get creative. A garage sale, downsizing from two cars to one, a part-time second job, or even using coupons to trim your grocery bill are all ways you can put more money towards your credit card debt.
Paying more than the minimum payment takes discipline and a little creativity, but it’s the fastest way to pay off your credit card debt.
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