Repaying Credit Card Debt: Two Interest Scenarios
Lets say John and Jane both have $2,000 balances on their credit cards, which require a minimum monthly payment of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payment. John pays only the minimum.
Each month John and Jane are charged interest on their cards outstanding balances at an APR of 20%. When John and Jane make payments, part of their payment goes to paying interest and part toward principal .
Here is a breakdown of the numbers for the first month of Johns credit card debt.
- Principal: $2,000
- Payment: $60
- Interest: /12 months = $33.33
- Principal Repayment: $60 – $33.33 = $26.67
- Remaining Balance: $1,973.33
These calculations are carried out every month until the credit card debt is paid off.
If John continues paying only the minimum, he will spend a total of $4,241 over 15 years to pay off his $2,000 in credit card debt. The interest alone will have cost him $2,241.
Because Jane is contributing an extra $10 a month, she’ll pay a total of $3,276 over seven and a half years to cover her original $2,000 in credit card debt. Her interest charges will total $1,276.
The extra $10 a month saves Jane almost $1,000, compared with John, and cuts her repayment period by more than seven years.
The lesson here is that every little bit counts. Paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which leads to lower interest charges in total.
What To Try Before A Credit Card Relief Program
When your debt becomes unmanageable, the first step should be to call your issuers. Even if youâve tried before, itâs worth another shot. You can do it for free, instead of paying a program to negotiate on your behalf. Look for the telephone number on your issuerâs site or on your card statements.
Be patient. Explain your situation. Ask for modified payments, at a level you can afford.
You can also work with a non-profit credit counselor, who can help with a budget and offer well-informed insight into how to manage your debt and your household costs. Theyâll look at the big picture and help find more affordable solutions. Workshops and seminars are often offered, along with one-on-one counseling sessions. Many large organizations provide access to credit counseling, from universities to labor unions, and although most reputable credit counselors are non-profit, many still charge small fees.
One more alternative: declaring bankruptcy. Itâs an option a credit counselor might recommend, with an explanation of the impact on your credit score and other consequences. Look closely at the terms attached to Chapter 7 and Chapter 13 before choosing one. But before you get approved, youâll have to get counseling from a government-approved organization first, within six months of applying. Filing fees required for a bankruptcy filing are often high, and an attorney sometimes needs to be retained and paid.
Trends In Credit Card Debt
All that spending showed in profits for credit card companies, which reached $22.93 billion in 2015, up from $22.67 billion a year earlier.
By contrast, two other major trends took place in 2015 in the credit card world and both benefit consumers: tighter security standards are in place and mobile transactions are becoming a huge part of the industry.
Improved security became an issue because of the number of security breaches at major retailers in recent years, including Target , Sony , Anthem Insurance and Home Depot . That made credit card fraud a major headache for cardholders, merchants and card companies alike. The Nilson Report says that fraud losses in the United States reached $8 billion in 2015.
That helped pave the way for the introduction of the EMV chip card that became a standard part of credit card transactions in October of 2015. The EMV chip makes duplicating card information difficult and should have a huge impact in reducing card fraud. No data is available yet on its effectiveness in the U.S., but the card has been available in England for years. Fraud in the U.K. dropped there from a high of $937 million dollars in 2008 to just $524 million in 2011 a 45% decrease. The U.S., home to 52% of the and fraud in the world, is hoping for similar results.
In the meantime, the up-and-down world of credit card debt is on an upswing.
Men own 29% more credit card debt than women . Alaska has by far the highest debt, ahead of Colorados and Connecticut .
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How Do I Pay My Credit Card Bill
At the end of your billing cycle, you will receive a bill from the credit card company for the amount you put on the card. This is the amount you need to pay back to the bank. By paying off your balance in full, you avoid any interest charges.
However, if you spent more than you can afford to pay off this month, you will carry a balance into the following month. Its important to pay off more than the minimum balance if you can afford it to avoid paying months or even years of interest fees.
Thanks to the Consumer Financial Protection Bureau, it passed the Credit CARD Act in 2009 which required issuers to make credit card billing statements easier to read. It also includes a section as to how long it would take you to pay off your debt if you only paid the minimum amount . If you cant pay off your balance in one month, its important to make a plan to pay it off over a few months time and not use the card for much in the interim to avoid hefty fees.
Your Credit Card Debt Questions Answered
Your credit utilization ratio measures the amount of credit youre using compared to your cards credit limit. If you dont carry a balance, your credit utilization is 0. A high utilization rate may indicate youll have a hard time paying your credit card balance on time, so a lower utilization rate is better for your credit score. You should aim to have a credit utilization ratio of 30% or less. Anything higher can damage your credit score. Not using your card enough can also affect your credit score because lenders wont be able to measure your creditworthiness.
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Understanding Your Rights As A Credit User
The final piece of good credit management is understanding how your rights as a consumer are protected under federal law. There are key consumer protection rights that help prevent predatory lending and other unfair lending practices, collector harassment and credit abuse. Knowing what these laws say can help ensure that every creditor, collector or financial professional you work with is doing what they should be going to help you.
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A Debit Card Uses Your Money A Credit Card Uses The Issuers
When you make a purchase with your credit card, you are borrowing money from your card issuer. You dont have to use your own money until you pay your credit card bill. By contrast, debit cards are linked to your checking account. When you purchase goods or services with your debit card, money is automatically transferred from your bank account the moment you complete the transaction. You dont have a bill to pay later because your account already paid for the transaction.
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Golden Rules For Travel Credit Cards
If you get these cards, ALWAYS FOLLOW THE GOLDEN RULES:
See our top picks and full info:Travel Credit Cards
Or see your chances of acceptance:MSE’s Eligibility Calculator
Online Or Phone Transfers
The cardholder gives the account information and amount to the credit card company to which they are transferring the balance and that company arranges the transfer of funds to pay off the account. If, for example, you are paying off a $5,000 balance on your high-interest Wells Fargo Visa card and transferring that balance to a Citi MasterCard with a 0% offer, you would provide Citi with the name, payment address, and account number for your Visa card, and indicate that you want $5,000 paid to that Visa account.
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Staying The Course While Paying Off Debt
Paying off debt can require means and motivation. A debt consolidation program can help by simplifying your bills and lowering your monthly payments. But even then, it can often be a stressful and time-consuming process that takes years to complete.
There’s no shortcut, but you can look for ways to save money and put the extra funds toward your bills. And if you receive windfall gains, such as a tax return, consider how much you can use to pay off debt.
While you might not have many monthly bills if you’ve consolidated your loans, you can also look into the avalanche and snowball repayment strategies to reduce your credit card debt. These can help you repay your debt as quickly as possible, or keep you motivated while you check off one account after another. And if you’re looking for help, many nonprofit credit counseling organizations also offer free debt and budgeting counseling with trained counselors.
Lowering Apr On Existing Accounts
While changes in the economy and missed payments can lead to higher rates, there are ways to lower rates, too. You always want to work to have the lowest annual interest rates possible on any of your credit card accounts. This ensures that if or when you carry a balance, you at least minimize the cost of doing so.
But dont expect that a creditor will lower your credit card APR for you! You must be proactive and call them to ask for a rate reduction. Simply call the customer service line for your credit card and ask to speak to someone about your rate. Then you can negotiate to lower the APR so you can minimize interest charges.
Interest rate negotiation works best when:
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Let Clearone Help You Settle Credit Card Debt
- ClearOne Advantage does not charge you upfront fees and offers personalized plans to suit your needs.
- Our Certified Debt Specialists make sure that you understand all the details of your debt settlement plan before you commit.
- We give you access to an online portal through which you can track your debt settlement progress in real time.
- Our expert negotiators have years of experience working out the best settlement deals for our clients.
- Our Client Relations Specialists support you throughout the debt settlement process to keep your efforts on track.
Debt Settlement Has Risks
Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:
1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
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How To Do A Credit Card Balance Transfer
How do credit card balance transfers work? After getting approval for a card with a 0% interest balance-transfer offer, find out whether the 0% rate is automatic or depends on a credit check. The next step is determining which balances to transfer cards with high interest rates should come first.
Next, calculate the transfer fee, which is typically 3% to 5% . Is there an amount cap on the fee? If not, that can make transferring larger balances worthwhile. Also check the on your new card before you initiate a transfer. The requested balance transfer cannot exceed the available credit line, and balance-transfer fees count toward that limit.
Need Some Advice And Support
If you get stuck along the way or just want some free and confidential advice and non-judgmental supportcontactMABS or read more about how MABS can help.
If you decide to contact MABS, it would be useful tonote all your questions andhave your most recent letters, emails or court documents from your creditors to hand and any credit agreements if you can find them.
You can also arrange to email either My Full Financial Picture or financial statement for a MABS Adviser to look at before your appointment if you wish. But even if you dont have this information, still make the call and MABS will help.
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Should I Switch To A Different Card To Pay Off My Credit Card Bills
A balance transfer is when you repay existing debt with a new credit card. This moves your balance to a new card. You could save money by paying less interest on your existing debt.
Use this free calculator to see how long it will take to clear your debt with your current card. Then, compare that with how long it would take if you switched to a different card.
Remember to check:
- How much youre being charged to transfer your balance
- If your interest rate will increase after a certain time
Talk to your credit card company or check their website. You might be able to do this online.
Cash Withdrawals Cost Money
With a debit card, there are no fees unless youre using a privately operated cash machine. If a fee is charged, youll be told how much youll be charged before you take the money out.
With credit cards, your card provider will charge you a minimum amount or a percentage of your cash withdrawal if you take money out from any type of cash machine.
You might not be told about this before you take out the money. Youll also start being charged interest by your card provider straight away, even if you pay it all off before your bill is due.
The same applies to other transactions that are treated as cash such as using a credit card to purchase foreign currency or gift cards, or for gambling transactions.
Its best to avoid taking out cash on a credit card.
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Types Of Credit Cards
Theres a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are some of the different card types youll find on the market.
Basic credit cards
A basic credit card comes with very basic features and few of the perks or rewards you might get with other cards. Common features may include low-interest rates or a $0 annual fee.
- Low interest. This type of card can offer a low-interest rate forever or a very low-interest rate at the beginning that reverts to a higher rate later.
These are designed to help you save money over time if you have to carry a balance.
- Balance transfer. With a balance transfer, you move your credit card debt to another card. A balance transfer card gives you a low-interest rate when you move your debt.
Some basic cards may carry this feature, though youre more likely to find this on a dedicated balance transfer card.
Basic credit card pros and cons
- You will be saving money immediately with no annual fees.
- Lower interest fees. Interest fees can represent the largest cost when it comes to credit cards, so having a card with low or no interest fees can translate into substantial cost savings.
- Less temptation to spend.Having a lower reward earning means you wont be tempted to spend unnecessarily.
- Less possible debt.If you have a lower interest rate on purchases, youre more likely to be able to repay your balance in full and avoid falling into debt.
Rewards credit cards
Specialty credit cards
How Do I Pay Off Credit Card Debt With A Personal Loan
Paying off credit card debt outright is usually the smartest financial strategy. Yet, if youre in so much credit card debt that you cant afford to simply write a big check and the debt avalanche method seems too overwhelming or slow to manage, it might be time to consider an alternative approach.
In situations where you have several different cards , paying them off with a low-rate personal loan can be a good idea.
- Step 1: Do some research into different loan providers , and find out the rates youre likely to get and the fees involved. If youll get a lower rate than youre paying now, and youll pay less in fees, a consolidation loan could be a good idea.
- Step 2: Apply for a personal loan from your provider of choice. You may have to submit credit card information so the loan provider can pay your card issuers directly. In some cases theyll transfer the money to your bank account, and then you need to pay off your cards yourself.
- Step 3: Pay off the personal loan according to its terms. If you can pay more than the required amount each month, thatll get you out of debt faster and save you money.
The benefits of this route include:
That being said, taking out a loan to pay off credit card debt can also be dangerous. Follow the terms of the loan carefully, or you could just make your situation worse. Avoid this route if you dont trust yourself to use credit responsibly. Otherwise, you could end up further in debt.
If you use this strategy, remember these key points:
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