Defeating debt

If you’re like many people, you probably think paying what’s requested by your credit card company on each bill is being responsible. As long as you pay what they ask and pay on time, you’re managing your debt well, right? Wrong! While paying the minimum amounts due on your credit card bills is keeping you out of trouble with creditors, it’s also keeping you in debt longer. This means you pay more in interest so your debts actually cost more.

Let’s say you get a credit card with 18 per cent APR; the minimum monthly payments are calculated as 2 per cent of your balance. You spend $1,000 on the credit card and decide not to spend anything else until you have the bill paid off in full. Do you know how long it would take to pay off the debt in-full?

If you only make your minimum monthly payments your first payment would be $20, but the payments would decrease gradually as you decrease your balance. You’ll be out of debt in 151 months (12 years, 6 months). You would pay a total of $1,396 in interest so the total amount you paid on your debt would be more than twice the tag price of whatever you purchased initially. Effectively, you stay in debt over a decade and more than double the cost of your purchase by only paying the minimum amount required by your credit card company each month.

Now, let’s say you decide fix your monthly payment at $20. Instead of just paying that amount the first month, you pay it every month regardless of what you bill says. You get out of debt in 7 years, 10 months and pay only $862 in interest. By fixing your first minimum monthly payment as the amount you pay every time, you save almost 5 years and over $500 in interest charges. Keep in mind, credit card minimum payments can’t fall below $15, so the most you’re ever paying extra is $5 per month. For just $5 or less each month, you can reduce the time you spend in debt by that much!

This is why it’s so beneficial to pay off your debts as quickly as possible. Each month you let pass means another month of interest accrued. Paying your debts off faster means you pay less, too. As you can see, it doesn’t take much extra money to make a big impact. At the very least, if you can afford the first minimum monthly payment, you should be able to adjust your budget to fix this amount as your payment every month.

If you take a look at your budget and can’t find a way to fix your monthly credit card payments even to match the current required minimum, then more likely than not you’re on the verge of financial trouble. Contact a credit counselling agency to let a trained credit counsellor assess your debts to help you determine the best way to find relief. With the right solution, you can take control of your debts now and develop habits to help you stay out of debt in the future.

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Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).  Consolidated Credit is a national non-profit credit counselling organization that teaches consumers about personal finance through web-based budget and debt analysis tools, financial literacy community outreach programs and in-person or telephone counselling. CAGT is a non-profit association with a mission to provide a dynamic forum in which members can share information and expertise.