Many consumers keep their creditors at bay by making the minimum payment each month. Minimum payments were once set so low that anyone paying only the minimum was, for practical purposes, only paying the interest accrued each month and not making much of a dent on the principal.
Federal regulators now suggest that higher minimum payments should be charged so consumers would pay off their balances in a more reasonable amount of time, which they defined as between seven and ten years. But even with a higher minimum payment, it can take consumers years to pay off the debt, if they continue to pay only the minimum.
Making a larger payment than the required minimum helps to pay off the debt quicker. Paying down the debt will result in a lower ratio of debt to available credit, which is a good sign of responsible behavior that will open up financial opportunities in the future.
When a comparison is made of a debt of $1,000 at 14.99%, it is easy to see why paying the minimum is such a bad idea.
• Making the required minimum payment of $10 per month will take nearly 9 YEARS to pay it off and cost $576 in interest charges.
• Making payments of $25 each month will take 4.5 years to pay off with $370 in interest charges.
• Increase payments to $50 per month and it will take just 2 years with interest paid of $158.
The more time it takes to pay off credit card debt, the more money will be lost to interest and other possible fees. Anyone carrying large balances from month-to-month may find that getting additional credit, such as a mortgage or car loan, may be more difficult.
To keep costs down it is important that an aggressive repayment plan is put in place and new purchases are kept to a minimum. With a reasonable budget in place and discipline to follow it, the price of using credit can be minimized.
