By Amanda Rebmann
Have you found yourself buried under a pile of credit card debt? There are ways to control it – with a little budgeting and discipline.
Since 2010, credit card statements have been required to disclose a minimum payment warning. This requirement was part of the CARD Act (Credit Card Responsibility and Disclosure Act of 2009), which targeted certain components of extending credit. As we all know, obtaining credit can be a good or bad thing.
On one hand, extending financing, particularly to the military, can be positive. It helps us purchase items that would otherwise be too expensive to pay for outright. However, credit can quickly become overwhelming, particularly when introductory rates expire and increase, or if an unexpected event forces you to rely on credit cards more frequently.
To pay less in interest, and decrease the amount of time you’ll need to repay your debt, always try to pay more than the minimum amount due. It’s easy to just pay that small amount on your statement each month, ranging anywhere from $15 to $100 or more. When money is tight, you need to make sure to at least pay that amount to avoid any negative credit reporting.
However, there are many benefits to paying more than the minimum amount due. You will pay much less in interest charges, and pay the balance off sooner. You will have more available credit in case of emergencies, and improve your credit scores. High balances negatively impact your credit scores, while maintaining a lower balance in relation to your credit line is considered a positive factor.
Let’s say you have a $1000 balance on your credit card with an 18 percent interest rate and your minimum payment is calculated as interest plus 1 percent of the balance. Using this example, the minimum payment would start at $25, and decrease as your balance went down. Even without using that credit card again, it would take you over eight and a half years to pay off the original $1000 balance, and you would pay almost as much in interest as the balance. Instead, if you pay a fixed payment of $35, you will pay over $600 less in interest and pay it off six years sooner!
Paying more than the minimum payment on your statement is a money saver for other types of debt as well, including installment loans, like a car loan, or even mortgage payments. Using a $200,000/ 30 year fixed rate loan at 4.5 percent as an example, if you pay just your minimum payment each month, you will pay the loan off in the anticipated 30 years and will have paid close to $165,000 in interest in addition to paying back the balance. Paying just an extra $50 a month saves you thousands in interest and takes about three years off of the loan.
For many people, debt cannot be avoided; we need cars and homes, and borrowing helps achieve those things. Budgeting can be difficult, and circumstances always arise that prevent us from devoting more of our paychecks to paying back debt. However, when you have the means to pay just a little or more to your monthly bills, you’ll come out with more money in the long run.
