If nothing else, the recent financial crisis has opened our eyes to the dangers of excessive credit card debt. Many consumers have long considered credit card debt part of life but when unemployment rises and foreclosures are festering, credit card debt seems like a nasty and preventable sore. Now many of us are wondering how we can quickly pay off our debt and save for our future. Try these paying off credit card debt tips.
Eliminating credit card debt takes discipline. In dieting they will tell you that you didn’t gain the weight overnight or in one month and that you won’t lose it in a day or month. In fact, it may take up to a year. Well with credit card debt the sad truth is that sometimes the debt is occurred in one night or one month and yet it may take years to eliminate credit card debt. Let’s take a look at the most productive steps for paying off credit card debt.
Which debts should I pay off first?
Most families have more than one kind of debt. There are mortgages, car payments, student loans, personal loans home equity loans and in some cases second mortgages and of course credit cards. In most cases, the highest interest rates are on credit cards. Here’s an example of the impact of making extra payments towards high interest credit cards.
Mortgage balance of $150,00 and 6% interest rate
Credit card balance of $10,000 and an 18% interest rate
If you paid an extra $100.00 towards your mortgage, you would save fifty cents on interests this month plus additional savings on principle each month thereafter. But if you send an additional $100.00 to your high interest credit card payment, you will save $1.50 this month plus additional savings on principle each month thereafter.
Paying extra toward a high interest credit card saves more money per month on interest, accelerates the payoff of high interest credit cards and increases your monthly cash flow in a short period of time. Once you’ve created a monthly family budget you can determine how much extra you can send towards a high interest credit card. If you have multiple high interest credit cards, start with the one with the highest interest but check out these tips for reducing credit card interest.
What Does Credit Card Interest Really Cost?
While interest rates on credit cards vary, most carry a rate that is between 15% and 22%. Store credit cards lean toward the upper end of this range. Many credit cards even have a provision that will increase the interest rate several points if certain terms are not met or if certain rules are not followed.
A common interest rate penalty results if a payment is late. Credit card companies will increase your interest rate by as much as five to ten percentage points if even one payment is received past the due date. Some credit card companies don’t lower the rate back until the entire balance is paid in full. Here’s an example of what charging $10,000 on a credit card really cost you in the long run if the minimum payment is $200.00 and you only pay the minimum payment each month:
Principle Balance: $10,000
Monthly Payment: $200
Months to Pay Off Balance: 94 (the last payment may be lower)
Total Payback: $18,622
Total Interest Paid: $8,622
Wow! So the television that you charged at the 25% off sale ends up costing you 180%.
How Much Does Sending Extra Reduce Credit Card Debt?
Here’s the same example but now the minimum payment is $200.00 but you are sending in $300.00 a month.
Principle Balance: $10,000
Monthly Payment: $300
Months to Pay Off Balance: 47 (the last payment may be lower)
Total Payback: $13,967
Total Interest Paid: $3,967
You can see that sending only $100.00 extra above the minimum payment each month saves you a lot of interest and cuts the number of months to eliminate the credit card debt almost in half.
Paying more than the minimum payment is a great way to eliminate credit card debt. Also remember to make credit card payments on time and don’t add any debt to the card that isn’t absolutely necessary while you’re trying to pay off the credit card.