Paying Off Debt? At Last, Some Helpful Information

Sunday, March 16th, 2008 at 10:30 pm

Paying Off Debt: What Is Debt Really Costing You?

Are you working on a budget and trying to pay off the debt you have? If not, you could be costing yourself several things, including your future.

Many people do not realize the true cost of using a credit card. Over time, the amounts you charge could be costing you a dream vacation, that dream home or even retiring early.

Anyone can make a change in their situation though, by exploring the options available to them. You may believe you need credit, but what you really need is a few cold hard facts.

The Scenario

If you assume you have a credit card with a credit limit of $8,000. You make a monthly payment every month, but you are only paying the minimum. Your credit line figures this at 2.5 percent of the loan’s balance. Your minimum payment each month is $200. You have an interest rate of 18 percent (the average American interest rate) on the credit card. You use it regularly, but are working to pay down the debt more than you use it.

By only paying the minimum on this loan every month, it will take you:

360 months to pay off the debt
It will take you 30 years to pay off the amount in full
You will pay $11, 615.32 in interest payments alone for this credit line.

Whatever you purchased for $8000 has now cost you, in total $19,615.22.

As you can see, having and holding onto this credit line for this long is going to cost you considerably. Many people make the mistake of paying only the minimum payment every month, which is where the real problem is.

Here is the same scenario but this time, you are paying down a total of $400 a month on the credit card. You still owe $8000, and you still have a monthly minimum payment of $200, but you will pay twice that amount.

You still have an interest rate of 18 percent as well.

If you thought you would pay half of this, you could be wrong, really wrong. Here are the numbers.

If you put $400 to your credit card every month you would:
Pay off the debt in 24 months
Have the credit card bill completely done in just 2 years

You will have paid $1582.61 in interest payments on this line of credit

Whatever you purchased for $8000 really cost you $9582.61

You will have saved $10,032.61 of your money.

Now, the picture is much brighter. The fact is paying down your debts like this really can do much more for you. For example, here is another scenario to consider.

If you spent the next two years paying off that $8000 worth of credit card debt, and at the end took the $400 that you were putting towards the credit card that you no longer needed to invest there, and instead invested the money, things will change even more.

Saving $400 a month for 10 years at 6 percent interest will give you $65,879.50.

Saving $400 a month for 30 years (the amount of time to pay off that credit card) will give you$403,815.05.

These numbers show much how much credit card debt is hurting you, and taking from your life. With just $400 a month, you could be living a much more luxurious life and have everything you want. Or, you could stay a slave to your credit card companies, working slowly to pay them even more.

The good news is that you can get out of debt and start living the type of life you really want to live.