Save Thousands On Credit Card Debt By Paying Off More Each Month
Are you smarter than a credit card? You're not if you're not paying off more than what the credit card company requires you to each month.
Say you're $10,000 in debt. Assuming a 19.9% APR, if you pay $500 a month, you'll pay it off in 2 years. Only pay $200? 9 years, and that $10,000 will cost you a total of $21,661. Only pay $60? You'll be paying off the credit card until you die, never being able to get ahead of the accumulated interest.
Scary numbers make brain hurt, so use John Maeda's free online tool which not only calculates the impact of different minimum payments, but also lays it out in a more digestible and visual fashion.
simplifying credit card debt [Maeda Studio] (Photo: Jeremy Brooks)
Post a comment
Comments:
Soooo paying off more of your debt will allow you to pay off your debt sooner. What a novel idea.
This also assumed that you're not like most people and just continue to use that card while you're paying it off.
Depends... How big a credit card?
Or you can not buy things you can't afford and pay it off in full every month! OMG what a crazy idea!
While this may seem obvious, the interest rates on credit cards mean that paying off your credit card will easily beat the pants off any investment out there. paying off that 20% credit card causes you to lose 20% less money than if you put your money in a mattress, and at LEAST 15% more than most savings accounts.
If you're diligent enough about paying off your credit card every month, you can even come out ahead by using rewards. Stick that in your private jet engines, citi.
@Mr. Guy: those huge ones, like the giant checks Ed McMahon used to hand out for Publishers' Clearinghouse.
So basically "Pay off your Debt and you Save Money!"
Quick, someone call Rick Romero!
if people could pay off their debt, they would.
What they need to learn to do is MANAGE their debt.
got 4 credit cards?
got a balance on all the cards?
well that was stupid.
Stop using your cards now.
what you want to do is eventually use those Balance Transfer Checks that they always send you to get everything on one card or maybe two and leave the other 2 cards EMPTY.
Then wait.
When you get a good balance transfer offer from one or both of the other cards, take it, move the balances from the high rate cards to the cards that now have a LOW RATE (probably for 6 months only, but mine have been offering a lifetime of 5.99% now).
By MANAGING your debt and moving it around you can eventually get yourself to a point where you have a balance but you are only paying 5.99% on it instead of 19-29%.
Yeah, there are fees involved but if you are looking at long term debt anyways and not winning the Lotto, start looking at your debt for the long term and managing it as such.
Of course if people could figure out how to do this, they probably would not be up to their eyeballs in debt in the first place.
@nicemarmot617: I fear that if this becomes common practice I might stop getting 3% cash back, double length warranties, and price protection. That money comes from someone.
@nicemarmot617: Sometimes it's about need and not about want-- repair the furnace, get new tires for the car that gets you to work, then have to repair the car for some other reason, etc. and it can get out of hand pretty quickly. I've got MOUNDS of credit card debt, but shopping for stuff I don't need is not really the reason why.
@OwenKlient: Well of course that can happen - the only times I haven't paid my card in full was when I used it to pay for emergencies. I was talking about big spenders, not people using it for necessity.
@timx: I agree. A blogger friend often has short posts like this, and while the spellcheck often caught some mistakes, different grammatical typos would inevitably make it through.
I'm a big fan of a way around this that is quick and simple: read the entire post backwards and out loud. Read the last sentence out loud from beginning to end. Then the second-to-last, then the next, etc. Because you're out of the flow of the narrative structure, you're generally not going to get ahead of yourself before you start reading the next sentence. You're going to catch more obvious mistakes before you finally hit that "post" button.
I'm not going to tell an author and blogger how to do their job, but it's like every fifth post has a commenter who catches these mistakes.
this may seem obvious to most people, but sometimes even the obvious needs to be pointed out. i know a lot about this crap now, but i'm not too proud to admit that when i first started using a credit card, i wasn't very responsible with it.
even though i knew $10/mo. wasn't going to pay off that $1000 card anytime soon & even though i sometimes had extra to pay it, i didn't. & when hard times hit, i certainly wished i had paid it off when i had the chance.
kudos to the consumerist for recognizing that not everyone is a credit ninja yet. much appreciated.
It is useful information to some. A lot of people don't realize that paying $100/month for 2 years will cost more in the end than paying $200/month for 1 year.
@homerjay wants Boston Legal back!: also assumed that you're not like most people who've been RIF'd, wage froze, hours chopped, etc.
@RonDiaz: I think xip is referring to the amount of extra interest you'd carry on the balance by taking two years to pay it off.
This is going to be tricky. How do I pay off more than full?
Well, many people (most Consumerist readers) know this, and I have a financial calculator reserved for making such calculations quickly, but many don't. All they have is a PC and Web banking. Many people need these tools to make informed decisions, and I imagine many people don't even realize the process of accumulating interest. Give 'em a break. Pictures tell all, and graphical tools like that really can drive the hard points home.
@RonDiaz: YOU FAIL, you did not include the extra interest for the additional 12 months in your calculations. At 19% interest you would pay $435 in two years if you paid $100 per month, at $200 you pay only $240 in interest, it's called compounding, and it is what makes you rich, or poor in your case.
Great idea.
Except for.....
Pay tuition, room and board for daughter. Buy some books.
Get that new Sony A900 + Zeiss lens.
Sure Honey, you can buy the 42" Plasma for the guest bathroom.
Life is good. Got the CC payment covered.
And then you roll through a pot hole and blowout two tires and bend the rims.
As good as we all plan for normal life things, there will always be something bad around the corner.
In the old days we kept $ under the mattress and hoped the house never burned down. These days we just defer part of our CC payment until next month.
Personally I have not deferred full CC payment in better than a decade. Knock on wood. I also know there is a pot hole waiting for me somewhere along the road of life.
@nicemarmot617: Do you have a mortgage or a car payment? If you do you are buying something you can not afford paying off in full each month. Unless this is true you are lying to yourself if you think you do not live with debt.
@homerjay wants Boston Legal back!:
Not just that, it results in you not paying as much above and beyond the actual purchase price of whatever you put on the card. A larger payoff means a smaller monthly interest fee.
So, basically, the idea is to live within your paycheck whenever possible (not buying a candy bar or going to the movies is possible) and not use the credit card. If you do, pay it off in full every month. That way, no fee.
@thrid001:
Even a car payment is ridiculous. If you can't put $350/month away into a basic cash deposit account then sending the same $350/month to a bank for a loan isn't possible either. Start after getting your next car. Put the money away like a car payment into an account that pays you money, stop when you have enough to buy a car outright in cash. Many bonuses to this, you paid less than the cash you outlaid because part of that is interest income. You also pay less because you can whittle down the purchase price because you're paying up-front in cash.
Mortgages are the ONLY thing that anyone should be taking a loan out on as it is next to impossible to just save up that kind of money.
@thrid001: Distinguishing between a mortgage obligation and a lease/rent obligation is some awfully fine hairsplitting. People who don't have access to suitable free shelter are going to be paying for somewhere to live. An academic argument can be made about the difference between the two, but each month a check for shelter will be written even if you want to call only one of those checks "debt" management.
A couple of differences, though, are 1) that fixed mortgage payments typically become a smaller part of an inflation-driven paycheck while rent typically tracks close to inflation, and 2) a mortgage can be paid off, reducing outlay for shelter while rent goes on forever.
Those benefits are offset somewhat in that the hit for walking away from a lease may be less dramatic but the idea that one can "afford" $1500 a month for rent but can't "afford" a $1500 PTI payment because it is "debt" seems fatuous to me.
I agree on the car payment unless one can earn more interest than one pays. My last car payment was 0% interest while the cash with which I bought the car earned interest at Emigrant Direct.
the IRS says my tax refund should be here by friday. at which point i will immediately pay off the 19.8% interest rate credit card that i took out last spring to pay for medications and medical expenses. i have been making payments each month of about twice the minimum, but it will be nice to click the 'make a payment' button and select the option for 'pay balance due' FINALLY.
finance charges are nasty when you can't pay the balance off.
@homerjay wants Boston Legal back!:
Works for mortgages too!
An extra $50 per month will save you a ridiculous amount of interest payments over the life of a typical 30 year loan.
Think of it this way.
After the first year of payments, you would have sent $600 straight to principal.
That's 29 years of interest on $600 that you don't have to pay.
Do the same thing next year, and that's 28 years of interest on $600 that you don't have to pay.
Ummmm.........how many people reading this article don't already know that? There's plenty of people not reading this article that do, but Consumerist's readership tends to be limited in scope to people that do.
wow. does "consumerist" pay for posts like this for our smart readers? (smart readers do not have credit cards btw)
@RonDiaz: Forgot the inevitable variable called interest. Though you get a B+ for showing your work!
@Cornelis Willem De Wit: Credit cards aren't evil nor are they the downfall of humanity. Credit cards are actually extremely helpful and have a variety of benefits such as cash rewards points security chargeback (which Consumerists love) and an easy way of tracking your expenses.
@Cornelis Willem De Wit: Additionally, it is not a bad thing to use a credit card to borrow money. Sometimes people need credit and don't have several days to wait for approval. People just have to be good about deciding what they actually need vs. what they want and pay off the debt ASAP.
@Corporate-Shill: Or you always keep enough in savings to cover that $1000 car repair or the $500 vet bill.
If wifey wants that 42" plasma make her wait until you have enough cold hard cash to cover the cost and have enough leftover to cover those unexpected expenses.
It's called living within your means as opposed to living at the bleeding edge of them. If you're spending almost every dime you're earning you have a serious problem - as soon as a hiccup happens in the road of life you're screwed.
@ajlei: oh i haven't gotten my W2 in the mail yet but we have a high tech option where turbo tax can log onto the payroll website and use my password and username to pull the info. i saved enough by paying off the card last night at midnight when the deposit cleared to cover the cost of the turbotax deluxe edition.
and my bank makes my 1099 info available online.
@JustinM: Here's something I'd like to do someday: I'd go to the car dealer, negotiate the best deal I can on a new car, and then tell the guy "look, I'm paying in cash [flash said cash] You knock a couple thousand off the purchase price on paper, and I'll give you the rest under the table. Lowers my tax bill, and you don't gotta tell nobody about the other $2K." The dealer is going to jump at the idea of getting a little tax-free green. I'd let them write up the bill of sale at the $2,000 less. Then I'd sign, shake hands, and pay them EXACTLY the amount on the paper. When they ask for the other $2,000 I'd show them on MY copy of the contract where it states that it is the sole agreement and no verbal or other promises are enforceable.
I wonder if it would work.
110 dollars from now until December frees me from the plastic devil.
I've paid off my credit card before. The problem is charging more stuff after I have a balance of zero. I think the current cultural attitude towards spending, will keep me from charging again this time around.
Why is it that we dream of "stuff" we want, than two weeks after playing with "it", the item no longer brings us joy?
Joy from stuff is fleeting!
@lordargent: I don't have a mortgage but thanks for this. This is as useful as the 13th payment or two payments per month "trick".
@pecan pi: Your weak so-called "Benefits" are so lame you make me shake my head.
Cash Rewards Points: How about interest on money saved? That's better, and immune to the psychological hooks of a CC.
Security Chargeback? My ATM card is subject to the very same protections as a credit card.
But your third thing- "Easy way of tracking your expenses..." Dude/dudette, I can just as easily download the activity from my checking account into Money as I can a darn credit card statement.
They aren't necessarily "Evil" but they do have costs that are hidden, and they lie in wait for even good people to screw up.
"You're not are if you're not paying off..."
THAT is what made my brain hurt.