If you're only paying the minimum on your credit card balance, it may be time to rethink your strategy.
The typical American household would need about 13 months to pay down the average debt of $8,195, according to a recent analysis by CreditCards.com. That's assuming they're being very aggressive and putting 15 percent of their income toward paying off debt. (The American Consumer Credit Counseling recommends allocating about 5 percent of your income, and Northwestern Mutual recently found that two in 10 people allocate over 50 percent of their income toward getting out of the red.)
What if you don't have 15 percent of your income, or even 5 percent, to spare? It's still better to pay more than the minimum, which is the least you're allowed to pay without incurring a late fee or other charges. Otherwise you could be stuck paying far more money for a far longer time, according to CreditCards.com industry analyst Ted Rossman.
"If you're only making the minimum payment, which is typically 1 percent of the balance plus interest, you're going to be in debt for literally decades," Rossman says. Over two decades, to be precise. Here's how it breaks down.
Let's assume you have close to the national average of credit card debt of roughly $8,000. The average interest rate on credit cards is now 17.41 percent, an all-time high. So if you're simply paying the minimum, it would take you roughly 23 years to pay off that debt.
Plus, you could end up paying roughly $11,000 in interest, according to CreditCards.com minimum balance calculator.
The more you've borrowed, the more expensive paying only the minimum can be, too. Finance site ValuePenguin calculated that paying the minimum on a $15,000 balance could mean paying a whopping $3,409 in interest charges over just two years.
Paying twice the minimum payment instead could save you $700.
If you do have a high balance on your credit card, there are a couple of ways you can avoid a long, expensive repayment plan. The first is to pay off more faster. If you pay 5 percent of the balance every month, or roughly $410, you'd cut the payment period down to nine and a half years — and save a lot on interest.
A better option still may be a balance transfer credit card. These cards are specifically designed to help pay down debt. Rossman recommends looking for a card that doesn't have an annual fee and provides at least a 15-month 0 percent introductory APR on balance transfers, such as the Chase Slate or Amex EveryDay credit cards.
"More people should be taking advantage of a balance transfer card," Rossman says.
Using one, you could pay off a $8,195 balance in 15 months if you put $550 a month toward the debt. And even if you don't pay off the entire debt within the introductory period, you'll be able to pay down a sizable chunk of the principal — which means less interest in the long run.
Though it may require some hard work and planning, Rossman says, "Everybody can get out of debt."
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