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A lot of people are cursing their credit card debt for putting them through so many financial problems. While the sentiment is understandable, you have to realize that if you only had enough knowledge about credit cards, you could have avoided this financial predicament.
This is what we hope you can get out of this article. You need to know how credit cards can really affect your life and how you can use it without wasting too much money on interest and other finance charges.
About the credit card debt trap
While credit cards can save you money through rewards, they also instill too much bad spending habits in us. It teaches us a lot of things that lead us to a lot of debt troubles. Here are the habits that we got used to because of our credit card debt.
Spending more than we can afford.
Credit cards allow you to use the money of the creditor to buy things that you cannot afford at the moment. Instead of waiting, we are given the chance to purchase what we want - but with interest.
Promotes irresponsible spending habits.
Since we are given the power to buy things without any immediate financial commitments, we don’t really think about what we buy. Instead, we just keep on buying until we reach our credit limit. We only realize our mistake when we see our bills. We already have a lot of credit card debt.
Keeps us from growing our money.
Since we are tied to our debt payments, we are unable to save our money or invest in growing our personal wealth.
Credit cards result in a debt with a high interest and various finance charges that waste our money on so many levels. Most of these are maximized by the minimum payment requirement that our creditors are teaching us to use as our primary payment method.
How credit card minimum payments waste your money
Minimum payments are the creditor’s way of making you pay the most interest on your cards. If you read the fine prints on the contract of your cards, you will discover a lot of things about it - especially with the fees. The higher interest you pay, the more profit for them.
The federal government is aware of this tactic and that is why they came up with the Credit CARD Act. This law mandates that credit card companies place the following details about minimum payments on every billing statement. If they stick to the minimum:
how long will it take for them to finish paying off the current balance?
how much interest amount will they end up paying the creditor for the debt?
This information seeks to educate consumers about the perils that await them if they stick to the minimum.
What happens when you stick to the minimum
Using the Bankrate minimum payment calculator, here are some helpful information to help you understand the amount of money you are wasting if you stick to paying only the minimum.
If you have a debt of $10,000 with an APR of 15%, your minimum payment will be $400. That is in the beginning only. It will go down as you continue paying off what you owe. This amount is computed based on the previous month’s balance. If you do not add to it, your balance will go down - so will your minimum requirement.
If you stick to the minimum, it will take you 148 months or more than 12 years to completely pay off what you owe. Not only that, you will be wasting more than $4,450 on interest. But if you pay $400 consistently every month, you will spend only 31 months paying your debts. That is only 2 and a half years of payments. This is more than a decade less than what you will spend on the minimum. You will also spend only $2,065.31.
If you add to that, like making your payments a consistent $450 amount every month, you can pay off your debt in 27 months and pay only $1,788.72 on interest.
How to pay more than the minimum
Now that you understand why you have to pay more than the minimum, let us discuss how you can do that. The challenge is when you do not have enough money to pay more than the minimum.
First of all, you have to start getting used to living without your credit cards - at least until you have paid off the balance on your debts. Then, you need to look for debt relief programs that can help you pay off what you owe. Here are your options:
Debt consolidation loan
This will involve a master loan that you will use to pay off your credit card debts. When you have completely paid them off, you don’t have to worry about the minimum payment already. All you have to worry about is paying the amount on your new loan. That can be a very low monthly payment if you got a secured loan or a personal loan with a good credit score.
This debt relief program involves a debt counselor who will help you create a debt management plan. This will be presented to the creditors. If the creditor agrees to the low payments proposed on the plan, your minimum payment can be ignored and you will stick to the new payment scheme.
This involves negotiating with creditors to allow you to pay off only a portion of your debt and have the rest forgiven. You will convince them that you are in a financial crisis for them to agree. Once they agree, you only have to pay the settlement amount - regardless of the minimum requirements on your cards.
Any of these debt relief programs can be effective in solving your credit card problems. But then again, it can be as simple as paying off more than the minimum.