If you are getting rid of credit card debt, the hike back up the debt free mountain might look very steep. It will be even steeper if you are only making the minimum payment on your debts. Learn why minimum payments are costly and how to get out of debt faster.
Why You Need to Avoid Minimum Payments
Are you living paycheck-to-paycheck and facing debt? This budget struggle often keeps people from their financial goals. Minimum payments seem a lot easier to manage in this scenario. However, it’s harmful to your finances in the long run.
Credit card companies used to make it seem like minimum payments are the way to go with confusing and perhaps misleading monthly statements. Now, the statements are very detailed about your financial picture. As a result, these statements can be a very powerful tool to eliminate credit card debt.
Besides the balance and due date, your credit card statements now tell your repayment details. In this example from Mycreditunion.gov, you can easily compare the timeline and cost of paying the minimum verses a larger monthly payment. The statements will also alert you to any penalties and provide explanations.
The Cost of Making Minimum Payments
There are a few reasons minimum payments don’t work. The first reason is that you will end up paying a small fortune just in interest. Here is an example using this Debt Payoff Calculator.
Let’s say you have $5,000 in credit card debt on a card with an 18% interest rate. By only making minimum payments, it will take 32 more payments or 2.7 years to pay off the remaining balance. Interest will amount to $1,314.
Furthermore, your cash will continue to be tied up for a long time without being productive. Making larger payments will get you out of debt fast. Then that money can be used on other debts or building an emergency fund.
Better Debt Payoff Strategies
Now that we know minimum payments actually cost money and make our finances unproductive, it’s time to get out of debt as quickly as possible. There are two popular strategies to knock out credit card debt. Check out this infographic to compare the Debt Snowball and the Debt Avalanche methods.
Therefore, it’s more important than ever to carefully read your monthly credit card statements to know how to successfully apply these debt repayment strategies.
To speak to a credit counselor today about budgeting and managing your finances, call 800-769-3571.