The time required to pay off your credit cards depends mainly on how much you spend! There is also another big pitfall that many people are not aware of and it is the low minimum payment.
The low minimum payments due each month are manageable and it is this low minimum requirement that leads many people into serious debt problems.
Minimum Payment Due
Credit issuing companies have different methods of setting the minimum payment due on your credit debt. Most common is to charge 4% of the balance of the debt though some lenders continue to charge the interest for the month plus only 1% of the balance.
On a credit card balance of $5000 at an 18% interest rate, the minimum payment due would be about $200. The truth is that if you pay only the minimum amount due on that $5000, it will take you over eleven years to
pay off that debt!
That number assumes you do not charge any more to that account during those years. That $5000 you charged to your credit account will cost $7900 by the time the account is paid in full.
What happens if you make a fixed payment on your account each month? This has a greater effect than you might expect.
If your current minimum payment is $200 and you continue to pay $200 per month on the $5000 debt each month, you will pay off that debt in full in only 32 months and the total amount you would pay is $6300. Making a fixed payment each month reduces the total interest paid to $1300.
Lenders count on consumers paying the minimum amount due each month on credit cards. As the debt balance slowly goes down, the minimum payments also are lower each month.
The effect is to stretch out payments over a long period of time and the result is a huge payment of interest on what was a moderate amount of credit debt.
If you can afford to pay $200 this month, plan to do the same next month and in the months to come. Ignore the lower minimum due and send a $200 payment each month!
Is that $200 an easy payment for you to make? How much more could you pay each month on that debt? Could you increase your monthly payment to $300? If that is the case, you would pay off that $5000 debt in only 20 months and pay only $800 in interest charges.
New Danger With Minimum Payments
There is a new danger in making only minimum payments each month. You may find you use your card more than you would use cash for purchases because you know the monthly payment will be reasonable.
Many people will keep using their credit card until they are struggling to make even the low payments due on their credit debt each month.
Credit lenders have been raising interest rates without reason in recent months. These companies are positioning their business to profit after new consumer regulations become law in 2010.
These laws will limit how often interest rates can be raised and the lender will no longer be able to raise interest on a whim. Until those laws take effect, consumers are at risk with their debt.
This risk is highest if you are a person who must stretch their budget to make that minimum payment on your debt. At 18% you payment may be only $200 this month. What happens if the lender arbitrarily raises the interest rate to 33%?
Your payment on the same debt might be unchanged but it is more likely the lender will require a higher minimum to cover the higher interest charges. That same $5000 of debt at 33% interest rate would require almost 21 years to pay in full and the interest alone would be over $10,000.
Paying the same amount of $200 a month with the higher interest charges, you would pay 43 months to eliminate that credit debt and in the end you would pay back over $8500 to the lender for the privilege of charging $5000!
When you consider adding a new HD TV, camcorder and computer, always do some head count before pulling the card over to the seller! Make sure to compare the numbers with your current budget status.
If you can pay the purchase amount when the credit card bill arrives, buying these itmes on sale might be a good deal for you.
If you must rely on paying for the purchase through minimum payments each month, you may be paying much more for that purchase than you intended.