When you’re living paycheck to paycheck, it can be tough to pay more on your credit card debt than the minimum payment. However, the numbers show that even if you can only afford to pay a few dollars more each month, you will drastically reduce your debt. Here is some advice on what to do.
Paying only the minimum means you’ll pay more in the long run. If, for example, you have a balance of $2,000 and you pay 10% of that balance each month, in three years you’ll have paid off your balance and $269.31 in additional interest, assuming your interest rate is 15%.
If you pay only 2% of the balance each month on the same balance and same interest rate, it’ll take you 14 years to pay off your balance and you’ll pay $2,205.63 in interest. So you can see that in addition to paying more, it’ll take you a significantly longer amount of time to pay off your credit card. Makes you wonder if that $2,000 television was really worth purchasing if in the end it costs you $4,405.63.
Additionally, the longer it takes you to pay off your credit card, the lower your credit score gets. Your FICO score is the number lenders look at when they’re determining your risk and whether to issue you credit. Mortgage lenders use it, other credit card companies use it and car loan providers use it too. Actually, employers often look at credit history too.
If you’re taking years to pay off your debt, it can reflect negatively on your ability to get credit, buy a home or a car, and get a job.
If you’re a slow payer, your credit card company may reduce your available credit. For example, let’s say you have a $5,000 limit and a $2,000 balance. You’re making the minimum payments on time but that’s all you’re making. You’re not paying a dollar more. Your credit card company may do something called “balance chasing.” This means they cut your available credit down to $2,100, a limit just above your balance.
This has a negative effect on your credit score too because it lowers your credit to debt ratio.
What’s the solution?
Even if you can afford a small amount more than your minimum balance due each month, you drastically reduce how long it will take to pay off your balance and how much you pay in interest. Continuing with the example above, if you have a $2,000 balance and a 15% interest rate and pay 5% of the balance each month instead of the 2% minimum, it’ll take you 5 1/2 years to pay off the balance and you’ll only pay $589.74 in interest.
So simply paying a few dollars more each month can shorten the time it takes you to pay off your balance by almost a decade and you’ll save thousands.
Tags: credit card advice, credit card payments, reduce debt
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[…] With a loan, the final payment date, loan amount and all other details are explained when you get the money. For a credit card, however, the processes of signing up and getting approved happens in advance of actually getting any money — and you don’t even “see” the money, you just “see” all the stuff. This creates a disconnect between the act of using the credit card and thinking about the money spent as a loan. Also, with credit cards, unlike many loans, the rates may change, and while you’re required to make monthly payments, if there’s no final date to replay the borrowed amount. In fact, the longer you take to pay off your balance, the happier your credit card company is. […]