Credit card debt is one of the hardest to get out of.
You have three things pulling you down.
One is the high interest rates that are placed on the balance of your cards - at least if you missed the grace period after a purchase.
The other is the temptation to keep on using your card.
And the last is the misunderstood concept of the minimum payments.
In fact, some financial experts will say that the minimum payment is probably the most effective pitfall that consumers fall victim to.
If you think that you are out of harms way if you diligently pay for the minimum, you have it all wrong.
Actually, that is what the credit card companies want you think.
Did you know that the amount on the minimum requirement is only 2% of your overall balance? If you do the math - which will be discussed later in this article, you will find that it will take you a lifetime to finish paying your credit balance completely.
Not to mention the thousands of interest that you will pay for in the process.
The government saw through this and mandated credit card companies to raise the minimum payment requirement that is indicated on every statement.
This was enforced through the Office of the Comptroller of the Currency.
From 2%, it is now up to 4%.
Before you curse the government, read on and you will realize that they are doing you a favor.
If you are only paying for 4% of your total bill, you are not really putting much dent into your balance.
Combine that with the average interest rate of 20% and any instances of late penalty charges, you will be old and gray and these credit card statements will still keep coming.
To do the math, you can search for online credit card payment calculators to help you understand how long you will be paying for your statements.
Let us look at some of the figures we got from online calculators.
Assuming that you have a $10,000 debt and your interest rate is set at 20%, here are various scenarios depending on the minimum amount that you will pay for.
Minimum payment of 2% at $200 a month Months to complete payment: 885 months or more than 73 years Total interest paid: $47, 125 Minimum payment of 4% at $400 a month Months to complete payment: 172 months or more than 14 years Total interest paid: $6,989 More than the minimum payment of 4% at $500 a month Months to complete payment: 25 months or more than 2 years Total interest paid: $2,266 All of these computations are done with the assumption that you will not be using your card to make purchases anymore.
If you notice the trend, a higher payment each month means lower interest amount and a shorter payment term.
Imagine paying for only 2% month on month.
It will take you 73 years to finish paying all your credit card debts.
But if you pay at least $500 a month, you only get to be in debt for a little more than a year.
This is the reason why you need to pay for more on your card statement.
Paying only for the minimum will get you nowhere.
But if you pay for more, you get to be credit card debt free immediately.