What is it costing you to do the bare minimum with debt?

If you have a credit card debt, it is a good idea to pay the minimum monthly payment. If you don’t feel that these payments are reducing your overall budget, it is a good idea to set your payments on autopilot so that you don’t have to think about the total cost.

Delia Fernandez is a certified financial planner who founded Fernandez Financial Advisory LLC, Los Alamitos. Fernandez says that “our pace of life has gotten really hectic.” “There is always something more important, especially for those who aren’t in financial crisis span>

However, inertia can be costly, especially when credit card interest rates reach 20.4% in November 2022 according to the Federal Reserve. Harris Poll’s 2022 American Household Credit Card Debt Study by NerdWallet found that U.S. households have been paying $1,380 per year in interest on revolving credit cards.

The good news is that even small changes in your payment habits may be worthwhile.

Although the slow drip of interest payments may seem manageable month-to-month, this approach ignores how much interest accumulates over time.

Bruce McClary, Senior Vice President of Membership and Communications at the National Foundation for Credit Counseling, says that if you can only make minimum payments and are paying an average interest rate, it can cost you thousands of dollars over many, many decades if you pay down $10,000. It’s amazing how much it can cost you.

Minimum credit card payments of 2% are common, so you would make $200 monthly payments for a $10,000 balance. Your interest rate is 20%. To become debt-free in nine and a quarter years, you will need to pay $12,508 per month in interest. This is more than double the cost of your total debt.

This assumes that you don’t have additional debt. The debt cycle will continue if you keep using the card for new purchases. To avoid paying more interest, it is best to switch to cash or debit for your everyday purchases.

McClary states, “You want to really sit down and examine the details that may make you uncomfortable. It’s better not to know than to know.” Even if you have a balanced budget and are making timely payments, it is important to understand how much debt you are paying .”

There are 2 ways to reduce the cost of your debt. You can increase the amount of your monthly payments or lower the interest rate.

Here’s an example: Let’s say you have $10,000 in debt. Now imagine what it would look like if you increased your payments. Let’s suppose you feel comfortable contributing an additional $10 per week or $40 per month to debt. You’ll pay $240 per month rather than $200 and spend $4,966 less interest. Your debt will be paid down nearly three-and-a half years faster. Even if your monthly payment is less than the minimum, you can still make a difference by paying more.

You might be able to negotiate a lower rate with your credit card issuer. You can reduce your interest rate by 20.4% to 18.9%, while still paying $200 per month. This will lower your interest cost by $38,886 and make your repayments faster by one year and seven months.

There are ways to lower your interest rates:

To inquire about your eligibility to a lower interest rate, call the number at the back of your credit cards. The worst case scenario is that you will not be eligible for a lower interest rate, but it won’t stop you from asking.

A balance transfer credit card that offers 0% interest rates is a good option for those with excellent credit. This can allow you to reduce your debts interest-free for up to two years. A personal loan may offer a lower interest rate that your credit card, but it could still be a good option.

Increase your monthly payment to reduce the cost of your debt.

Pay $240 per month towards a $10,000 loan at 18% interest to reduce your interest payments by $6,697 (compared with where you started) and make your debt pay off nearly four years earlier.

Fernandez states that it is compound interest that kills people at higher interest rates. “You don’t want to be the one that understands it and makes it happen. You don’t want the one making credit card companies rich span>