Saving on Credit Card Debt

Getting out of credit card debt is a little like trying to escape quicksand. One wrong move and you sink deeper. Once your debt reaches a certain point, the effects of compounding interest rates and shockingly high fees can become too much weight to bear.

The proportion of families carrying a credit card balance rose 1.8% to 46.2% between 2001 and 2004 according to the Federal Reserve’s Survey of Consumer Credit. The median balance rose 10% to $2,200. Fortunately it wasn’t all bad news. The majority of people don’t carry credit card balances at all. Paying off your balance every month is the cheapest way to use your credit cards. This way you pay no interest and no late fees. However, if you are one of the 49% who do carry balances your aim should be to educate yourself on how to join the majority as quickly as possible. Your goal has to be to eliminate your credit card debt once and for all. The big problem is how exactly do you manage to save on credit card debt and ultimately eliminate it.

If you have one credit card the answer is straight forward, if not simple. Always pay more than the minimum payment. Your minimum payment is calculated as a percentage of your current balance.Often paying only the minimum will stretch your debt repayment to more than a decade, all the while ensuring a steady stream of income from interest payments for your lender. Each credit card agreement is different so you should always check your agreement carefully. Currently most credit cards calculate it at approximately 4% of the outstanding balance.

As your balance reduces you will see your minimum payment reduce. The temptation is to sit back and be proud that you are reducing your balance and to enjoy the freedom of a little extra money available for you to spend each month. This is the biggest mistake that you can make.

Assume you owe the median debt of $2,200 and that your rate is in the region of 11%, just under the median according to the same fed survey. At the rate of 4% your monthly minimum would be $88. If you pay this figure every month it would take you 29 months to clear your debt and you would pay $310 in interest.

If however, you chose to pay the minimum payment of $88 the first month and then the new reduced monthly payment each month after that, it would take you 98 months to clear the debt and you would pay $615 in interest or roughly twice the amount! Add to that late fees and that figure could easily double.

Now what if you have more than one credit card? Is the rule the same? Well broadly speaking yes. If you can, look at all your credit card debts today. If you are able to afford the current minimum payment as it stands, go ahead and fix your payment at that amount and never pay a penny less. Watch those balances reduce each month, but don’t be tempted to keep adding to your debts.

If you have any extra money left over after paying that minimum payment, the question is how do you decide which credit cards to pay off first? The common advice was to always to pay off the card with the highest interest rate first. Unfortunately over recent years credit card companies have steadily increased late fee penalties, and $50 fees are not at all unusual. It only takes a couple of these before it begins to really add up. To reduce this risk it is much better to take any additional money you have and pay it to the card with the smallest balance.This way you reduce your potential number of late fees if for some reason you can not make your payments on time in the future.

Staying focused and motivated is essential if you have any hope of success. Keep a list of your credit card balances and track your progress as you reduce your debt. It is a wonderful boost to be able to cross each debt off your list.

Once you have eliminated one credit card debt take the money you were paying to that credit card and pick your next debt to target for elimination. Pay ALL of the money to the next target debt until it is eliminated. Continue until all of your debts are eliminated. As time passes rather than snowballing higher and higher you will see your debts begin to fall away at an increasingly rapid rate.

As you clear a credit card, ask yourself whether you really need it. Take a look at the annual fee. You may find that you can eliminate another $75 from your credit card costs by simply calling the company and canceling your account. That $75 fee is yet more money you can use to further reduce your debt.

Once you have eliminated your debts take the lessons that you have learned and apply them to a saving plan. Save what you can. That way next time you have to make a large or unexpected purchase you may find that you can already afford it. Let your money work for you.