Getting into credit card debt is easy. Life circumstances happen, a few unforeseen issues come along and you end up with a huge amount of credit card debt, often spread over several cards. This comes at a huge cost. While it’s easy to accumulate the debt and feel good about the quick cash influx, paying it off is one of the most painful financial battles consumers go through. Interest rates can be up to 30% making it difficult for consumers to pay off their credit cards.
Here’s what credit card companies don’t want you to know. They would love for you to keep making minimum payments on your big pile of credit card debt for the rest of time. They don’t want you to pay off the whole thing and move on. Why you ask? Read on...
The High Cost of Minimum Payments
Ever heard of compound interest? It’s a great thing if you’re earning it, i.e. if you have money invested and get compound interest on it. You’ll earn interest on top of your principal and the earned interest. But if you owe money, compound interest is your enemy. If you’re only making minimum payments on your outstanding debt, the debt ends up taking much much longer to pay off. We think that minimum payments are in fact the biggest credit card trap out there. Forget about late fees, annual fees; minimum payments is how they “get you”.
As an example: If you had debt of around $10,000 with 18% annual fee, it could take you 20 years to pay off this debt if you were to only pay minimum payments each month. So that nicely costly family cruise would take two decades to pay off. And the amount paid would be $20,000 (that’s the initial $10,000 PLUS $10,000 in interest).
Well, it’s simple: just pay off more than just your minimum required monthly payment. If it was only that simple, right? In reality, you do have a few options but one thing is key:
Pay off your credit card debt first and put all other debt payments on hold, assuming the interest on those is lower than your credit card. So lower your payments on your student loans, car payments or whatever else you have and focus on increasing your monthly credit payments by as much as you can
Focus on one card: Tackle on credit card, the one with the highest interest, first.
Transfer your balance, but be careful and make sure the fees and the interest of the card you’re trying to transfer to are not too high
Ask your credit card company for a lower interest rate: Tell them you are going to make an honest effort at paying off your debt but are really struggling at the current rates.
CIf all else fails: Try to settle with your credit card company before your debt goes to collections. Because once that happens, your credit score will take a BIG hit. Try to avoid that at all costs.