Help My Budget

When it comes to your monthly credit card payments you may feel like you’re being responsible by paying the minimum amount requested on each credit card on time every month, but are you really doing right by your finances? In a practical sense, paying only the minimum amounts due on your credit card bills isn’t very fiscally responsible at all, because it maximizes the amount of time you’ll be in debt. As a result you pay more in interest, which means you end up paying more for your purchases than what’s reasonable.

Consider this example:

You buy a new laptop with all the bells and whistles that costs you $1,000. You make the purchase on a new credit card with a zero balance, 15 per cent APR, and a payment schedule where your payments are calculated as 2 per cent of your total balance. So you make the payments required, starting with your first $20 payment and then paying less each month because your bills go down as your debt decreases.

Sounds good right? It would, except using this method you end up paying $851.03 in interest and won’t pay the debt off in-full until late 2021. So your $1,000 actually cost you almost $2,000 and took almost a decade to pay off. This is why maintaining a minimum payment schedule really isn’t a wise way to handle paying back your debts. You may have paid $20 on your first payment, but only $7.50 of that paid off the actual debt (the principal); the other $12.50 covered the interest. Since most of every payment you make covers interest, you only decrease your principal by a few dollars each month.

This problem becomes worse when you consider most of us don’t make one purchase on a credit card and then stop purchasing until we have the bill paid off. In a real scenario, while you are only paying off your principal debt by a few dollars each month, you’re probably adding a lot more than that. As a result, your total debt is consistently rising to the point you eventually either max out your credit card or can’t afford to make your minimum payments anymore within your regular budget.

If you want to use a better strategy to pay off your debts, consider committing to a fixed payment schedule. This doesn’t even have to be a large sum of money either. Using the example above, if you can simply commit to fixing your first payment amount and paying $20 every month rather than just the first, you pay off the debt in 6.5 years instead of 9.5 and only pay $579.12 in interest. This doesn’t require you to free up any money in your budget, you simply have to stick to the payment you made the first month every month after.

If you’re having a big enough problem with debt that you can’t even commit to paying the same amount each month, it’s probably a sure sign you need debt relief. Consider contacting a credit counseling agency to speak with a trained credit counselor. They can assess your debts and often provide free advice to help you find a debt solution. With the right assistance, you can get your finances back on track and be better equipped to manage your debt in the future.

Connie Solidad has been writing about finances and debt consolidation for years. She’s an expert in the industry and writes about debt management and credit counseling options and resources. When Connie is not working, she loves playing with her two dogs in Tampa, Florida. To learn more about debt management refer to ConsolidatedCredit.ca.