The following video answers this question by revealing the sad fact that if you make a minimum payment of $225 a month it will take 71 months or almost six years to pay off your credit card debt. And the interest alone will cost you $5,887 for a total payback of $15,887.
Why this happens
The reason why it would take you so long to pay off that debt and cost so much is because your interest is compounded every month. Albert Einstein is said to have called “the power of compound interest the most powerful force in the universe.” This quote is probably apocryphal but the fact remains that compound interest is your friend when you invest your money. But it’s definitely a bad enemy when it comes to credit cards.
How compound interest works
For the sake of an example let’s take a $10,000 credit card balance at a 14% interest rate that’s compounded monthly. This means your first month’s payment would $116.67. If you were to make a minimum payment of $200 (2% of $10,000) then only $83.33 would be applied to the principal. So next month your balance would be $9916.67 which would mean $115.69 in interest. Your minimum payment would then be $193.33 but only $82.64 would go towards the principal. If you continued to make just the minimum payment it would take you more than 36 years to pay off your original balance assuming you didn’t add any new charges.
What happens if you double your payment
Going back to that $225 payment in the first paragraph of this article if you were to double it to $450 you’d have that debt completely paid off in just 27 months. And your interest cost would be only $2094 or a savings of $3792. While this is just an example the same thing would be true regardless of your balance or interest rate.
The simple fact is that the more you pay on that credit card debt every month the faster you will have it paid off and the more money you’ll save. In fact, paying off that debt is actually better than saving for retirement. The reason for this is also simple. If you were to put that money in a savings account you’d probably earn only about 1%. In comparison, if you paid off that $10,000 you’d be basically earning 17% on that “investment”.
What else you could do
If doubling up your credit card payments just isn’t a realistic option, there are other things you could do to cope with that $10,000 debt. For one thing, you could contact your lender and ask to have your interest rate reduced. In fact, if you could get it cut to 12% and made the same payments of $450 a month you’d have your debt paid off in 26 months and it would cost you just $1,366 in interest.
If doubling up on your payments doesn’t seem like a reasonable solution you could contact a firm like National Debt Relief to settle your credit card debt for you. In most cases, a good debt settlement company can get your debts cut by nearly 50% and have you debt free in 24 to 48 months. Plus, your debts will have been consolidated in that you will no longer be required to pay your lenders. You’ll send one check a month to the settlement firm instead. And that payment should be considerably less than the sum of the payments you’re now making. However, to be a good candidate for debt relief you must owe at least $7500 and be a number of months behind on your payments. But when this is the case debt settlement might well be your best option.
Debt never dies
There’s no magic wand you can wave to get rid of credit card debt. Once you incur debt it’s there to stay – until you repay it. You could stop making payments on that $10,000 debt but it won’t disappear. It will ultimately be charged off and sold to a debt collection agency. Then, instead of having to pay your lender, you’ll have to settle up with a debt collector. Plus, that charge-off will have a seriously negative effect on your credit score and will stay in your credit reports for seven years. When potential lenders see that default they’ll be much less likely to loan you money because you’ll be seen as a serious credit risk.
If you’re struggling with credit card debt there is help out there. Check out the best ways to reduce your debt at ww6.wpengine.com.