|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
http://www.stretcher.com. You'll find hundreds of FREE
articles to stretch your day and your budget!
A couple of months ago I read an
article about getting finances under control. According to the
article, you can double the minimum monthly payment on a revolving
charge and that account will be paid in full in 36 months regardless
of the amount. How could that be possible? Especially considering
how "minimum" most minimum monthly payments are.
Gail asks a very good question. How
much would you need to increase your monthly credit card payments to
pay off the debt? The average balance for people who hold at least
one credit card is now over $9,000. So a lot of people should be
asking the same question!
Let's take a look at the numbers. To
allow for a common comparison we'll assume a $1,000 balance and an
interest rate of 14%. We also assumed that nothing new was charged
to the account and that the smallest payment allowed would be $10.
Most credit card companies require a
minimum monthly payment of 2%. That's what they feel earns them the
most money. Remember that their goal is to keep you in debt for your
Gail were carrying our pretend $1,000 balance and made the minimum
2% payment each month, she'd be making payments for 156 months or 13
years! She'd pay a total of $935 in interest.
Is it possible that she could shrink
that to 36 months by doubling the minimum payment on her statement
each month? Unfortunately, no. If she were to do that, it would
still take 77 months or 6 1/2 years to pay it off. The same is true
for different interest rates. Even the lowest of interest rates.
However, it is possible that the
article meant doubling the minimum payment the first month and then
continuing to pay the same dollar amount every month until the debt
was paid off. Let's see how that works on our pretend $1,000
For instance, if Gail doubled the
minimum monthly payment to 4% (or $40.47) and kept paying that same
amount every month, she would in fact have it paid off after 30
months! Regardless of the size of the balance. A higher interest
rate could add a few months, but the results are still dramatic. So
the trick is to double the current minimum payment and then stay at
that level until the bill has been paid off.
Soon most credit card users will be
facing higher minimums anyway. In 2003 the Office of the Controller
of the Currency told banks that minimum payments had to cover all
fees, interest owed and pay down some portion of principal. For most
credit card issuers that will mean raising the minimum to about 4%
of the account balance each month.
The biggest credit card issuers have
already started moving in that direction. And most are expected to
follow. The resulting changes in minimum payments could have a major
impact on some families.
For many people, paying more than the
2% minimum doesn't seem possible. Their budget is based on that
amount and there's nothing left of their paycheck after the minimums
are paid. Unless these families can find a way to squeeze some
savings out of other expenses, they're heading for trouble.
In fact, the banks expect that some
borrowers will not be able to pay the increased minimums. Some have
already prepared by increasing the reserves that are used to pay for
the write-offs that occur when people can't pay their bills.
What can you do if you're struggling
just to meet the monthly minimums now? Begin by looking for expenses
that can be cut which will free up more money for the monthly credit
If there's just not enough money to
pay increased monthly minimums, contact your credit card company.
They would rather work out an affordable payment plan than have you
Increased minimums are not all bad
news for consumers. This could be a good opportunity for borrowers
to take control of their finances. Especially those who think that
just paying the minimum is an acceptable way to manage credit.
We can already see that budgeting for
the monthly minimum puts borrowers at the mercy of the lender. Any
increase in interest rate or minimum will cause them trouble. In
effect, the amount of their monthly payment is out of their control.
And, as evidenced by Gail's question,
paying more than the minimum does allow for credit card balances to
be eliminated. When you don't carry a balance you effectively pay
less for everything that you buy. It's like buying everything on
Hopefully Gail will be able to adjust
her budget and double the minimum payment until her balance is gone.
This article provides real
help to people in credit card debt. This is something
they can take and 'run with' to get their debt under
control. I love the debt smart newsletter."