Here’s one of the most important things to know about how credit card debt works. Let’s say you have a $1,000 balance and that you stop going any further into debt. And let’s say you pay the minimum amount that the credit card company requires each month.
If you do that, your required monthly payment will actually decrease a little bit each month. This month, it may be $40. Next month, it might be $39, and then $38, and on and on.
Isn’t that incredibly kind of your credit card company? I mean, who else that you owe money to asks for less each month?
Beware The Declining Minimum Payment
Of course, it isn’t kindness at all. It’s math. Your monthly payment is based on a percentage of your balance. If your balance is going down a little each month, then your required minimum payment will go down a little each month, too.
Paying this declining minimum payment each month is what will keep you in debt for approximately… forever!
In our $1,000 balance example, assuming your credit card charges 18% interest and requires a minimum monthly payment of 4% of the balance, paying the declining minimum payment would take you nearly six years to pay off that debt. And it would cost you nearly $475 in interest.
Charge $1,000 worth of stuff, pay $1,475 for it? Not a good idea.
Put In The Fix
Here’s a better plan. Fix your payments. If you can afford $40 this month, you can probably afford $40 next month. Paying this fixed amount will get you out of debt way faster.
Sticking with our example of a $1,000 credit card balance, if you fix your payments at $40 per month, you’ll go from a nearly six-year payoff plan down to a less than three-year payoff plan. Just by continuing to pay the amount that you paid last month, you’ll wipe out more than three years of credit card payments. And you’ll pay about $200 less interest.
One of the reasons it’s easy to get in the habit of paying the declining minimum each month is that the required payment goes down by such a small amount each month. It’s easy to miss the fact that declined.
So, write down this month’s required minimum. Then, next month, when your credit card company showers you with kindness and asks for a little less, tell them, “Thanks, but no thanks. I’d like to be out of debt before I have grand-kids, so I’m sending you what I sent you last month.”
Of course, you don’t need to include a note. Just send them the money – at very least, the same amount you sent last month. Even better if you can add some money to that fixed minimum. (To compare the impact of putting extra money toward your lowest balance debt vs. your highest interest rate debt, watch my two-minute video on the topic.)
The Best Debt Payoff Calculators
To compare the payoff time frame and interest payments of making declining minimum payments versus fixed payments, use this Bankrate.com calculator. To see how long it’ll take to get out from under several debts, use the Accelerated Debt Payoff Calculator on my web site. It assumes fixed payments and allows you to run what-if scenarios based on making more than the fixed minimum payments each month.
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