Credit Card Payments
For many Americans, monthly credit card payments is a constant challenge as they struggle to get out of debt. And, they pay a price for this in terms of additional interest charges, late payment fees, hits to their credit history and personal stress.
According to the Federal Reserve, credit cards represents the second largest portion and is the most expensive form of unsecured consumer debt today. Consistent, on time credit card payments will help your credit score and your ability to borrow money in the future. But first, you need to payoff your existing credit card debt, then you can move forward and gain control of your financial life.
Consumer Credit Card Payment Basics
Credit cards are open, revolving credit. Your credit card lender establishes a minimum monthly payment amount that allows you to “roll” the remaining balance to the next month payment cycle. Your lender, of course, charges you interest on the remaining balance that is rolled over.
These interest payments are the core business model of credit card lenders. They live off this interest and desire that you pay this forever. It is to your advantage to avoid this roll over and completely pay your monthly credit card balance on time. If so, you have essentially a no cost, interest free consumer loan (excluding annual credit card membership fees).
A credit card lender determines your minimum monthly payment as between 3-5% of your current balance total, so this changes every succeeding month. If you do not add any new purchases, your rolling balance total will be reduced and your minimum payment will also be reduced. If your goal is to payoff your credit card debt, you cannot play this financial game of just making the minimum monthly credit card payments.
Your monthly budget needs to prioritize credit card payments to payoff your total credit card debt balance within 12-24 months. To do this will be financially difficult, painful and require much discipline on your part. But you will regain financial control of your life.
Otherwise you will remain what is referred to as a “debt serf.”
Calculate Your Credit Card Payment
To make it easier for you to calculate how much you should budget monthly for your credit card payments, we have included one of our online financial calculators. To use the credit card payment calculator, enter your total amount of credit card debt, the average (or weighted average) interest rate of your credit cards, and the duration of the payoff time.
The duration of the payoff time is the only variable that you will be adjusting to determine your monthly credit cards payment budget. It should not exceed two years.
Payment Discipline And Consistency
If you have an outstanding credit card balance, you have a debt problem. It is painfully simple to understand.
Credit cards allow you to pay for things now that you cannot afford to pay for in cash. You either are living “beyond your means” or you have had a life emergency that required the use of credit cards due to insufficient savings.
They are many reasons as to why you and others like yourself have gotten to this financial situation.
Now it is time to make changes to regain control of your financial life. Here are recommendations:
- Acknowledge and understand you have a credit card debt problem. It adversely affects you in many ways.
- Create a budget of your income and payments. Use our debt-to-income-ratio calculator as a guideline to know where you stand.
- Your credit card accounts will no longer be available for any future purchases. Put them physically away.
- All non-discretionary (must pay) electronic payments (electricity) should be transferred from a credit card account to your bank debt card. You will no longer be using credit for non-discretionary payments.
Avoid taking on more debt. You cannot reduce your credit card balance total unless you stop using your credit cards.
Don’t add to your problem. Be focused and disciplined.
Credit Card Payment Alternatives
This credit card payment calculator also provides two alternative payments options for you to consider. Option 1 uses a Balance Transfer Card while Option 2 uses a Personal | Debt Consolidation Loan.
You must have a very good credit score to qualify and get lower interest rates for these credit card payment options to be considered.
Credit Card Balance Transfer
This is a form of debt consolidation. Many lenders offer this type of credit card to consolidate unsecured debts. You use this type of card to consolidate your existing credit card balances to this new credit card.
These types of cards offer special “teaser” 0% APR introductory rates on balance transfers, giving you a limited time to pay off debt interest-free. At the end of the introductory period, the balance transfer credit card APR will increase and may be higher than what your are currently using.
You need to account for lender balance transfer fees when determining the total cost of consolidating your credit card debt.
Debt Consolidation Loan
This is also a form of debt consolidation. You take out an unsecured personal loan at a lower interest rate than your existing credit card debt. You use the funds from the loan to consolidate and pay off your existing credit card balances. This leaves only the low-interest loan to repay.
You need to account for lender loan origination fees when determining the total cost of our credit card payments.
Additional Payment Alternatives
Here are additional, credit card payments alternatives that may fit your particular financial situation.
Home Equity Line Of Credit
You take out a secured personal loan using your house equity as collateral. The interest rate will be less than an unsecured personal loan. The manner of use is the same in consolidating your credit card debt.
However it is not recommended since you risk loss of your house in case of payment default.
Debt Management Program
This is offered as part of a Consumer Debt Counseling service. Essentially it is a centrally administered credit card payment plan by a credit counselor. You fund a budget for creditor payments, but the credit counselor does the communicating and directing of payments with your creditors.
There is a setup fee and monthly administrative fee for the service.
This is debt reduction rather than debt consolidation. Debt settlement comes into play only with your unsecured debt like credit cards, medical bills and personal loans.
This debt relief option will help you only if you have a financial hardship and have little likelihood of repaying your creditors.
Filing for debt bankruptcy is the ultimate, last resort of credit card debt relief. There are many cases where this is really the best option for you to get out of credit card payments and start over.
However debt relief bankruptcy is a complex, legal process that requires expert advice to ensure that you achieve the best outcome and move forward with your financial life.
Monthly credit card payments are a constant challenge for Americans as they struggle to get out of debt. They pay a price for this in terms of additional interest charges, late payment fees, hits to their credit history and personal stress.
You need to establish a monthly budget to prioritize credit card payments to payoff your total credit card debt balance within 12-24 months. This will be financially difficult, painful and require much discipline on your part.
An overview of credit card payments options is presented. This includes 1) Credit Card Payment Basics; 2) Determining A Credit Card Payments Budget; 3) An Online Financial Calculator; and 4) Financial Alternatives To Fund Your Budget.
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