Pay more than the minimum credit card payment each month.
Paying more than the minimum payment on your credit card each month is so important because of the effects of compound interest on your balance. Add the fact that credit card rates border on usury these days, and paying only the minimum amount required by the credit card company can be disastrous.
For example, let’s assume you have credit card debt in the amount of $10,000 and an interest rate of 20%. If you only pay the minimum amount (generally 2.5% of the total balance) each month, it will take you more than five years to pay off the debt. And you will end up paying more than $6,000 in interest on the original $10,000 debt. That’s 60% of the face value of your original debt being paid to the credit card company in the form of interest!
The reason why the percentage is so high is the phenomenon of compound interest. Compound interest is known as one of the “Great Wonders of the World” because it accelerates the amount someone can earn on his or her money exponentially. Unfortunately for those of us carrying credit card debt, it also accelerates the amount of money owed exponentially.
If you have credit card debt at a 20% interest rate and you cannot earn a 20% annual rate of return on your other investments, you should not be investing. Instead, you should be paying down your debt as quickly as possible. In rough economic times like these, it is insane to pay 20% annually to a credit card company. Pay off credit card debt as quickly as possible by paying as much towards each payment as you possibly can.
