It’s not a secret that the economy was not that great for along time. It has not improved 100% but it is a little better for some. More and more people are still living paycheck to paycheck. Unfortunately, when you are in that position often times you are only paying the minimum payment on your credit card. Even if you can afford to pay a few extra dollars on it every month, it will help to reduce that debt drastically.
For example, let’s say your credit card holds a $2000.00 balance and every month you pay 10% of that balance. In three years you will have paid off that balance plus $269.31 in interest (if your interest rate is at 15%).
Now let’s look at the same scenario as above but let’s say you only pay 2% of that $2000.00 balance every month. Now you’re looking at not paying it off for 14 years! As if that wasn’t bad enough, you’ll find that you’ve also paid $2,205.63 in interest. Clearly you can see that maybe purchasing that $2000.00 TV wasn’t such a great idea now that it actually ended up costing you $4405.63!
The Longer You Take, The Lower Your Credit Score
Another thing to keep in mind is the fact that the longer it takes you to pay off your credit card balance, the lower your credit score will be. Your score, also known as FICO, is what people look at when they want to determine what type of risk you would be if they give credit to you. In other words, taking years to pay your debt can negatively influence your ability to not only buy a car or a home but to even get a job!
Credit card companies will also lower your available credit if you’re a slow pay. For example, let’s say you have a $5000.00 limit and a $2000.00 balance and are only making the minimum payment. You may find that you credit card company does some balance chasing. What does this mean? Simply put it’s exactly what was mentioned at the beginning – they lower your available credit. For example, they could lower to $2100.00 which is just above your balance.
This too will be a negative mark on your credit score. Why? Because it lowers your credit to debt ratio.
What’s the solution?
Even if you can only afford to pay $5 to $10 extra a month on your minimum balance, do it! It’s going to shorten how long it takes you to pay off the debt and greatly reduce the amount you pay in interest.
Do you have any Debt Repayment tips that worked for you? We want to know!
Andrea is the Chief Chick of Smart Money Chicks. After filing BK twice (once because she panicked, second time because the pro messed the first time up), she realized that it all could have been avoided if she understood more about how her Finances worked and the options available. At that point, she wanted to help as many as she could never make the same mistakes again. Our Promise is that all the content you read on here is created or edited by Andrea