Once you're in debt, getting out of debt can be a real challenge. The larger your debt grows, the higher your minimum payments become and the more you end up paying in interest. This is especially true when it comes to credit card debt. Because of how much interest can add to what you owe, you should avoid making just the minimum payments. Doing so can result in becoming trapped on a financial treadmill of sorts.
Why You Should Pay More Than The Minimum
Paying down the minimum just isn't going to work if you have a lot of credit card debt. This is because the interest on that debt will counteract the minimum you've paid. Basically, you'll barely put a dent in what you owe because of the interest. The minimum payment is usually quite low as well. Credit card companies calculate the minimum that you owe every month as a percentage of the total balance -- including the interest that's owed for that month. Most credit card companies only charge 2 to 4 percent of the total balance as the monthly minimum. As you can imagine, even without the interest, it would take a long time to pay off a significant amount of credit card debt by only paying the minimum every month.
Let's say that you owe $5,000 on your credit card. Your interest rate is 18.9 percent. The minimum payment is $200 every month. If you only pay the minimum (and you don't use the card again for more purchases), it would take you 11 years and five months to pay it off. Not only will it take that long, but you'll end up paying more than $3,000 above your principal balance due.
How to Pay Off Debts Quickly
So how should you manage your credit card debt in order to pay it down as quickly as possible? First of all, stop using your credit cards unless you absolutely have to. If you continue to use your cards, you're going to get trapped in a cycle of never-ending debt. Secondly, pay more than the minimum whenever possible. Not only will your balance go down, so will the interest you're being charged. This is because the interest charged to you is based on the total amount you owe. If you owe less, you’ll pay less interest.
If you can't pay more than the minimum, then continue paying the same amount as that original minimum payment every month until you can afford to pay more. If you're not using your card, your balance will slowly go down, which means your minimum payments will go down eventually too. If your minimum payments go down but you're still making the same payment every month, you'll be making some progress, and that cycle can continue. As you owe less, but continue to make the same payment amount, more of your payment will apply to your principal.
If you have multiple credit cards, then pay the minimum on all but one. Choose the one card that has the highest interest rate and put all your extra money towards paying off that credit card first. Once it's paid off, move on to the credit card with the next highest interest rate.
Learn How to Get Out Of Debt Today
Dealing with debt can be difficult, not to mention stressful. Here at Safe Money Partners, we can provide you with professional advice on how to pay off debts quickly. To find out how you can pay your debts off quickly, contact us to schedule an appointment for a free consultation today.