Debt Reduction Means Stop Paying the Minimum

Credit card companies thrive by putting you in debt--and keeping you there. And they have one feature that is extremely effective to accomplish this: the minimum payment.

The only way to really get serious with debt reduction is to pay more than the minimum toward your credit card balances.

Your minimum monthly payment is the lowest amount you can pay to avoid defaulting on the debt. If you don’t pay the minimum, your company will report this to the credit bureaus and will take action against you. Though you may avoid credit rating and collection hassles by paying the minimum, you will never get your debt paid off if this is the only amount you ever pay.

Minimum payments used to be set relatively high, usually between five and ten percent of the outstanding balance. You had to pay more per month to meet the minimum requirement, but the debt could actually get paid back.

Credit card lenders figured out, however, that setting the minimum payments lower meant the debt would stay on the books for a much longer period of time. And a longer period of time meant significantly higher revenues for them, all because of compound interest.

Consider this example: You owe $1000 at 12.7% interest per year (about one percent per month). The minimum required payment is five percent per month, or $50 for the first month. Because your payment goes toward the interest first, $10 (one percent of the principal)is applied to interest and $40 goes toward the principal, so your debt the next month would sit at $960.

Now say that your credit card company changes the minimum payment to two percent. This may sound good in terms of minimum payment, but it makes a big difference, and not in your favor when it comes to debt reduction. You are only paying $20, which sounds better than the $50 you were formerly paying. But the interest allotment is still $10, which means that you have only paid back $10 toward the debt. Your principal goes down just a little, to $990.

It can be tempting to look at the interest rate you are being charged without thinking about the difference if all you do is pay the minimum every month.

Always make a point of paying more than the minimum unless you absolutely cannot afford to. It may feel like money for nothing, but it’s better to pay now and get it over with than to pay for years and years to come.

Consider Balance Transfers To Help With Debt Reduction

You probably have lots of credit cards and regularly receive offers for more. The credit card market is very competitive, and there is likely at least one card available that would be better than one you already have.

To attract customers, credit card companies offer deeply discounted rates when you transfer existing balances to them. The reduced rates last for a set time period, but they can still save money for you, especially if you switch to a new card with a lower APR offer each time the existing offer expires.

This does mean that you need to apply for a new card fairly often, but it can be done online, so it’s not very time consuming. Plus, the effort can mean good savings for you.

You may not have to transfer to a new card to extend an introductory rate offer. If you call and request an extension, many will extend the rate to get you to stay with them.

Make sure you understand the terms and conditions of a special offer before you go for it. You might find that the ‘special low rate’ lasts a very short time, or that it applies strictly to transfers rather than a new purchase. Commonly, you will see fine print to allow transfer of balance at 0% APR, but 19% or more on new purchases.

It can be a nasty surprise to find that you have to adhere to a minimum time frame to get the intro rate; that is, that you can’t transfer to another card for 6 months or possibly more. Be sure to read the fine print before you transfer funds.

It isn’t in your card issuer’s best interest to let you know when your intro rate expires. Mark the expiration date on your calendar or enter a reminder into your computer schedule. Time can really fly, and if you go over the intro expiration date at all, you will start paying interest at their normal (usually pretty high) rates.

Moving debt among cards can impact your credit score in funny ways. On one hand, lenders think, you might be a low-profit customer because you leave before they can realize any profit off you. But it also reflects on your willingness to take offers, and they might be the ones that will keep you long term. Consider how important this particular debt reduction option is to you and your budget. It's not for everyone, so due diligence is required.

Some companies won’t like your playing “musical cards,” while others will love your resourcefulness. One note: The big advantages won’t last. The more you pursue this strategy, the fewer offers you are likely to get, and you will stop getting the best rates until you have improved your credit score to the
Top of the list.

Keep track, and if it works for you, then work it. But, if it doesn't, you can't get credit card intro rates to help with debt reduction, then consider the alternatives available which include strict budgeting, credit counseling, debt settlement, etc.

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