Wednesday, February 08, 2006

How to Reduce Debt

Paying off debt is easier once you stop using your cards.

* • Pay off your highest interest credit card debt first, making sure you avoid the "minimum balance trap." Because credit card companies make their money from interest payments, they purposely set those payments low so it will take you years to pay off the balance. Paying just a little more than the minimum can make a big difference.

• For example, assume you have a balance of $5,000 at an interest rate of 15% and you make the minimum monthly payments of 2.5% of the balance or $25, whichever is greater. It would take you 183 months to pay off the debt and cost you $4,395 in interest. However, if you were to pay an extra $150 each month, you would pay only $845 in interest over 27 months. This is a hypothetical example for illustrative purposes only.

* • Consolidate your debt by transferring outstanding balances to lower-rate cards. These days, the competition between credit card issuers is so intense that you can often negotiate your interest rate. If you don't want to transfer your balances, chances are that your current credit card company will match the interest rate of a competitor. Just be aware that some of the low rates available these days are "teaser rates," which only apply during the first 6 to 12 months you have the card.

* • Cancel your old cards so you won't be tempted to use them again. The most you need is two. And leave them at home unless you really need them.

* • Set up a realistic payment timetable and stick with it. If you need to readjust your timetable, do so. If you have trouble, talk to a professional. The counselors at the nonprofit National Foundation for Credit Counseling can develop a more structured plan for you, if needed. To find their nearest location, call 1-800-388-2227, or log on to www.nfcc.org.
Pay Extra and Save
You can eliminate debt and save money by paying more than the minimum monthly amount on your credit cards. The table below shows the difference between making an assumed $20 minimum payment on a $1,000 debt versus paying $40 a month.
Total Payments Months to Pay
$20/month
6% $1,126.97 56
12% $1,353.43 67
18% $1,783.97 89
$40/month
6% $1,025.24 25
12% $1,103.28 27
18% $1,199.00 29

Assumes a monthly compounding of annual percentage rate and that amount due (principal plus accrued interest) must be paid in full.

source: yahoo.com

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