Making Minimum Payments
Q: I owe about $10,000 on my credit cards and I've been making the minimum payments. Why does it seem like it will take forever to get out of debt?
A: Making the minimum payments on your credit cards will keep you in debt for a very long time. Based on a balance of $10,000, an annual interest rate of 18.9 per cent, and only making the minimum payments required (2.5 per cent), it will take you more than 30 years to pay off the debt. Along the way you will pay more than $16,000 in interest.
Making minimum payments will keep your accounts up to date, but it won't help you get out of debt any time soon. You need a plan that allows you to meet your monthly and seasonal expenses and pay down your debt. This is where a lot of people struggle because they don't set money aside for the things that always come up. As a result, they find themselves relying on their credit cards and never getting ahead.
I encourage you to review your budget to see how much you can afford to pay each month. Making a fixed payment of $300 every month would pay off your debt in four years and save you almost $12,000 in interest!
You also may consider a strategy of paying off the debt with the highest interest rate first, while keeping the other accounts up to date. Once the first debt is paid, target the next account with the highest rate of interest until all your debts are paid in full. This will further reduce the time it takes to pay off your debt.
The key to all of these strategies is having a realistic spending plan that works for you. Seek professional advice if you need help to get started.
You will regain control of your money and save thousands of dollars.