The bills come in; our cash goes out. It’s a familiar rhythm. When it’s time to pay your credit-card debt, you may want to spend the least time possible looking at that bill. Who wants to revisit the damage done by the air-conditioner you had to replace… that 50-percent-off sale at your favorite store… and other life needs and wants that just keep piling up?
But take a good, hard look at that bill — because it’s got valuable information to keep you from being crushed under a snowballing debt.
Specifically, you want to drill down on the “Minimum Payment” part, a little box that is required to appear on every credit card statement. Think of it, and the numbers it contains, as a flashing light, warning you of danger ahead.
The CARD Act to Protect Consumers From Burdensome Debt
It was created by the 2009 CARD Act (Credit Card Accountability Responsibility and Disclosure Act). The CARD Act is a piece of legislation designed to help protect consumers from unfair lending practices by credit card issuers and help consumers avoid burdensome credit card debt.
That minimum payment may seem tempting — and reasonable — when you have lots of other bills to pay. But it’s critical that you not pay just the minimum, because paying only the minimum balance due on your credit card bill can keep you trapped by debt for decades.
The CARD Act requires that issuers inform cardholders how long it will take to pay off an existing balance if they just pay the minimum each month. The warning must also show you the monthly payment that would pay off your balance in 36 months, as well as the total amount you’ll be spending on interest.
Why Minimum Payment Disclosures Matter
Here’s why you should pay attention to these figures: If you pay only that minimum, you are in for one long, hard battle to rid yourself of that credit card debt. Especially right now.
In response to the contracting economy, the U.S. Federal Reserve has raised interest rates three times in the past three months — and more increases are likely on the horizon, says Financial Consultant Raj Patel, a debt-consolidation specialist from Clay Advisors. Add to that that the average rate of credit-card interest on revolving balances is currently 16.65%, and you can see why the “danger” signs are flashing.
The minimum payment disclosure lets you know just where you stand — and helps you see just what it will take for you to pay your way out of your current debt. Let’s consider this example:
Check Out the Credit Card Minimum Payment Numbers
- Current credit card balance: $7,916.70
- Minimum payment: $159
- Time to pay off debt owed: 23 years
The disclosure on your bill lets you know it will take you an eye-watering 23 years to pay off your credit card debt. And worse? You will pay $16,350 in total, due to the compound interest that multiplies month after month. Meaning that what cost you roughly $8,000 now cost you twice that.
Here’s what else the box will share – akin to a light at the end of the debt tunnel.
- Current credit card balance: $7,916.70
- Payment to pay off in 36 months: $266.74
- Time to pay off debt owed: 36 months — just 3 years!
If you instead pay $266.74, says the disclosure, you will be unburdened of your debt in three years. What’s more, you will have spent only $9,600 in total — or about $6,500 less than Scenario Minimum Payment above.
Getting Out from Under Your Credit-Card Debt
You may feel a knot in your stomach as you read this, but this is motivating, truthful information to have! It shows you just how pricey putting charges on plastic can be. Here are some tactics to try to wrangle your credit-card debt:
- Go cold turkey. Just stop using your credit cards. You may not be 100% successful, but minimize charging as much as is possible. Get in the habit of using cash instead.
- Prioritize paying down your credit card debt. Set a goal for how much you want to pay down in what time frame — if you just plan to put ‘whatever’s left over’ toward your debt, you probably won’t make serious progress. So set a goal such as paying down $6K in debt over the next year, which allows you to focus on paying down $500 in debt each month, or approximately $125 per week. Let the disclosure box guide you. Remember, it shows you what to pay to eradicate your debt in three years’ time.
- Think small. If you have a couple of high-interest accounts, try this tip from Jason J. Krueger, a certified financial planner and an adviser with Ameriprise Financial Services in Madison, WI: “I like to focus on the debts with the smallest balances first. Eliminate that debt and monthly payment. This can really help psychologically as you see progress being made.”
- Consider a consolidation loan. You might benefit from debt consolidation if you are feeling overwhelmed, says Patel from Clay Advisors. In this scenario, you are basically paying off your high-interest credit-card debt with funds from a single loan you now hold. These loans are usually at a fixed rate, and the interest is often lower than what you are paying on your cards. This can be worth exploring to get that debt — and its relentless high interest rate — off your back.
Whichever route you may take to beat your way out of the debt jungle, let’s say a little thank-you to that Minimum Payment Disclosure box for highlighting the smart path forward.