Beware of Minimum Payments

Americans are slowly falling further and further into debt. Much of this is due to the instant gratification mentality so rampant in our society. Credit cards, with their ease of use and their ability to get us whatever we want within a matter of minutes, have only fueled this desire. Unfortunately, many are spending more on their credit cards than they can afford to pay each month. As a result, they stick only with paying the minimum payments. Satisfied with themselves for paying their monthly bills, consumers fail to realize how far they are putting themselves in debt when they fail to pay the balance off in full at the end of each billing cycle.

How Much is Minimum?

Until recently, the most common minimum payment amount that was enforced by credit card companies was 2% of the outstanding balance. Credit card companies were happy with this amount consumers wishing to pay just this minimum balance would not find themselves out of debt anytime soon. In fact, it could take years to claw your way out of debt by paying just 2% each month, even if you stopped making purchases with your credit card.

More recently, congress has become involved in regulating the minimum payment percentage. Congress was concerned about the impact millions of Americans in debt would have on the political and financial future of the country. Therefore, the minimum payment now averages around 4%. Despite the raise in the minimum payment, it will still take consumers years to get out of debt if they pay only the minimum.

Determining Your Own Minimum

Rather than let the credit card company tell you what your minimum payment should be, it is best for you to decide that on your own. If you are like most Americans, you are carrying a credit card debt from month to month. In fact, the national average is $9,000 in credit card debt. The minimum payment simply won’t due. Instead, take a look at your incoming cash flow and determine how much money you have available to send to your credit card each month. Build your own minimum payment into your monthly budget and make sure to send it.

Getting Ahead

To further help yourself get out of debt, you might also consider transferring your credit card balance from a high interest credit card to one with a lower rate. The national average APR is 14%, but you can do much better than that. In fact, many cards offer special 0.00% APR introductory offers. Take advantage of these cards and save on interest rates.

Think about it, if you own just $1,000 and you have a card with a 14% APR, you are paying $140 per year in interest. If you are the average American and have $9,000 worth of debt, this comes to $1,260 per year. If you have a credit card with an 8% APR, on the other hand, you will pay just $80 per month on a $1,000 debt, or $720 per year. That $720 is still tough to swallow, but is much better than $1,260.

After transferring your balance to a 0 APR credit card, be sure to send that saved money to the credit card in order to help bring your balance down. Any money you send in addition to the amount you budgeted for each month will just bring you that much closer to your goal of becoming debt free.

Monitoring Your Spending

Paying extra attention to your spending habits is often a good way to help get yourself out of debt. You might be surprised at what you discover if you take 30 days to monitor your own spending habits. Write down everything you purchase during that 30 day period. You will most likely discover that you could save a great deal of money by eliminating a few extras, such as the number of times you go out to eat for lunch. This extra money can then be applied toward your credit card bill and help get you out of debt.

Staying Out of Trouble

After you manage to get yourself out of debt by paying more than just the minimum payment, be sure to never fall into that trap again. When making purchases with your credit card, never spend more than you are capable of paying off at the end of each billing cycle. One way to help prevent overspending is to keep your credit cards at home while you are shopping. This will help prevent you from giving into impulse buying tendencies.

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This entry was posted on Thursday, May 4th, 2006 at 1:05 pm and is filed under Tips & Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.