Ways of Paying Down Your Balance
The most important step in reducing your credit card debt is to decide the best way to settle it. In order for your account to be considered current, your card company expects you to pay at least the minimum payment. However, this is not a cost effective way to settle your credit card balance as you end up paying a lot of interest. To determine how long it will take to pay off your credit card, you need to know your current balance, annual percentage rate (APR), and what rate your credit card applies to calculate your minimum payment.
There are many online calculators that show how long it will take to pay off your credit card if you pay only the minimum payment. They also let you see how soon you can settle your balance if you pay a fixed amount higher than your minimum payment. Some calculators also allow you to input any additional charges that you intend to make to compute the length of time to pay off your credit card bill. Use this calculator at www.smartmoney.com to compare different payment options. You can also use the NPER function in Excel to calculate how long it will take to pay off your card. Remember to use a minus sign for the payment that you hope to make when using this function, as this is a cash outflow for you.
For instance, if your credit card balance is $1000, and the minimum rate is calculated based on 2percent of the outstanding balance, then the minimum payment amounts to $20. Provided you do not charge any additional items to your card, and your APR is 15 percent, it will take 79 months (six years and seven months) for you to settle your credit card balance, if you pay only the minimum payment. In the process, you would pay total interest charges of $586. Alternatively, if you pay $30 each month, then you can settle your credit card balance in 44 months (three years and eight months), while paying interest charges of $305. Not only can you settle your credit card faster, but you save interest charges of $281.
Now that you understand the benefit of making a higher payment on your credit card, commit to paying down your credit card balance with a monthly payment in excess of your minimum payment. The easiest way to stay on track is to arrange a monthly automatic fixed payment transfer from your bank account to your credit card account. If you find that you can make payments higher than this in some months, do this so that your balance goes down even faster.