How to Reduce your Credit Card Debt
Credit card debt is destroying many Americans’ financial lives. Credit card sharks continue devouring our savings with outlandish interest rates of up to 30%. Credit card debt makes bankers wealthier, while making borrowers poorer. The biggest problem consumers have, apart from paying these ridiculously-high interest rates, is continually making minimum monthly payments.
Let's Look at an Example
Consider for a moment that you have a credit card with a balance of $5,000. Suppose that the lender charges you 19% interest on the borrowed money, which is not at all uncommon in today’s economy. You are required to pay a monthly minimum of 2% of the balance ($100). Making just this monthly minimum payment, it will take you a little less than 37 years to pay this off debt, and you'll not only pay the bank the $5,000 you owe, but also a whopping $14,767 in additional interest payments over the life of the debt! If this scenario sounds familiar, and you have massive credit card debt, you can eliminate it much more quickly than you realize. To make a few calculations for yourself, see how much your debt is costing you with our handy calculator. This will help you estimate your savings if you change your repayment habits and pay MORE than the required minimum. Remember, the minimum payment on your statement may make your monthly obligation easier, but it is designed to keep the bank's profit as high as possible and you will pay for it in the long run. Fortunately, you have control over this greedy tactic.
So, What Can you do About It?
The first step may be the toughest – you have to stop using the credit card. If you have two credit cards, cut up the one with the largest balance, and keep the other for emergencies only. Next, you must pay more than the minimum payment on one of the credit cards every month, until it’s paid off. Here’s how you do it.
To eliminate credit card debt quickly, you first have create what I call a Debt-Killing-Factor. Begin by evaluating your monthly income and debt, including money you spend on consumable items like gasoline, utilities, groceries and recreation. How much of what’s left can you afford to spend on your credit card debt? You must set a realistic goal for an amount to add to the minimum monthly payment.
If you can create more money to add to your Debt-Killing-Factor from saving some change or cutting out wasteful spending, this will help eliminate the debt much faster. Most people, if disciplined with their spending, can take five to ten percent of their net income and put it toward a Debt-Killing-Factor (DKF).
Assume you decide that you can pay an extra $50 monthly for your DKF. If you have two credit cards, one with the aforementioned $5,000 balance and another with $2,000. you'll tackle the latter, which has a minimum payment of $40, first.
If you pay the minimum on the $2,000 credit card, and it has an interest rate of 19%, it will take you almost 21 years to pay it off. By adding $50 to the minimum and paying $90 monthly, you'll pay off this entire credit card debt in just 28 months (a little over 2 years), and you'll save over $4,000 in additional interest payments.
Of course, what we've just described are examples, but all credit cards have different interest rates and minimum payments. If you would like to calculate the time to repay a current credit card debt, based on what you owe and your minimum required payment and interest rate, use a credit card calculator to do this. Remember, though, the key to successfully eliminating your credit card debt is to first set a goal for creating your own Debt-Killing-Factor. Settle on something that won’t make managing your money too difficult, and stick to applying it to your chosen debt each month. You’d be surprised at how quickly you can save $40, simply by socking away the extra money you save from grocery coupons or store specials.
Once you have one card paid off, you'll be eager to rid yourself of that money-draining $5,000 credit card in our example above. The balance will never get any smaller as long as you make just the minimum payment every month. It’s time to turn your DKF into a full-fledged debt-killing machine, and you can use one eliminated credit card to quicken the assault on another.
Next, you'll tackle card number 2 from our example above. Assume the minimum monthly payment on the $5,000 credit card, which has an interest rate of 19%, is $100. Again, if you pay just the minimum every month on this credit card debt, it would take you 37 years to eliminate the debt. Armed with the power of your Debt-Killing-Factor, you can pay it off in under three years, without changing your lifestyle one bit.
First you have to add some fuel to your DKF. Remember, you were paying a minimum payment of $50 on the $2,000. You added just $40 to that to bring your DKF to $90. That debt was killed 28 months later. You now have the $90, and you no longer have the credit card debt that it killed. So, you simply add the $90 to your $100 minimum monthly payment for the $5,000 credit card debt, and you have a new DKF of $190. Pay this every month, and it will take you just under three years to kill this credit card. Best of all, you'll pay just $1,385 in interest to the credit card company and, in the process, you'll cheat the greedy leeches out of 34 years of monthly income and $13,382 in interest, keeping it all for yourself.
Our examples have clearly illustrated that paying the minimum on a credit card, even if it has a relatively small balance of a few thousand dollars, can take decades and cost you tens of thousands of dollars in interest fees. If, however, you create a Debt-Killing-Factor, a monthly payment above the minimum, using extra money you save and “find,” you'll kill these credit card debts in a few short years and save a small fortune.
The Price of Your Debt (Calculator)
Ways to Save and Pay More Toward Your Credit Card Debt
Following are some solid inroads to locating more funds for your DKF. Just remember, in each of these examples, you would normally spend the money, so it’s not new money. Treat it as though you have spent it, but save it instead. At the end of the month, it becomes part of your Debt-Killing-Factor.
- Grocery member card savings: Most groceries and pharmacies have member savings cards. You swipe the card at checkout, and you save money on your bill. So, if you spend $100 at your grocery, you might save between $7.00 and $10.00. If you shop twice a month, you should accrue close to twenty dollars, with just this one method.
- Grocery/gas station joint venture savings: Every state doesn't have this program, but it’s my favorite for jamming my Debt-Killing-Factor full of powerful extra dollars. The grocery chain Giant Eagle has teamed with the gas station GetGo to save shoppers at the fuel pumps. For every $50 spent at Giant Eagle, you get ten cents off of a gallon of gas at GetGo. So, if you spend $400 in one month on groceries, you’d save 80 cents per gallon. For a 15-gallon tank, you'll save twelve bucks. Without the savings program, you would have paid the full amount, so throw the $12.00 into your DKF.
- Coupon use: If you're going to be successful at eliminating credit card debt and creating a monster DKF, you have to be good at collecting and using coupons. Got a 2-for-1 pizza coupon? You just saved up to ten dollars that you would have spent on those two pizzas, if you didn’t have the coupon. You eat the pizza, but feed your DKF the savings.
- Save those nickels and dimes: You buy some batteries at the hardware store, and they cost $4.12. You hand over your five-dollar-bill, and pocket 88 cents. This is the easiest money in the world to spend, but it can also be a valuable credit card debt killer. Toss change like this into a bank at home, and at the end of each month, you'll probably have ten to fifteen bucks. Deposit it into your checking account and add it to your credit card payment; it just became part of your DKF.
With these four very easy methods alone, you can easily save fifty or more dollars every month to add to or start your Debt-Killing-Factor. And with a little creativity, you can probably come up with many more dollar-saving methods of your own. Remember, every dollar you put toward your DKF and pay down those cards and eventually consolidate any remaining debts.
Oftentimes, people struggle with the concept of the DKF. They look at it as simply using more of their hard-earned income to add to debt. If they were good at adding to credit card debt, they’d already be in better shape financially. The concept, though, is as simple as it seems, if you understand its most basic fundamental - not using more income or getting a second job to make it work. The money is already in your wallet or bank account; you just have to find it in the crevices. You can continue this remarkable cycle and eventually, your Debt-Killing-Factor will be big enough that you can probably apply it to larger items, such as your car loan or mortgage and pay them off in half the time.
Good luck and contact us if you have any questions!