DEBT REDUCTION STRATEGIES: HOW INTEREST PAYMENTS KEEP YOU IN DEBT
By: Dan Cavalli
Letâ€™s say Janie has a credit card with a $2,000 balance and an APR of 20% (the rounded numbers are for simplicity). Janieâ€™s interest payment for the month would be $33, but her minimum payment is only $40.
She pays the $40 and does not use her credit card for the next month. When the next statement comes, Janie will owe $1960. Again, she is charged $32.67 in interest and her minimum payment is $40. Janie has paid nearly $66 dollars in interest just in two months, but her balance has barely budged
If you are struggling beneath a mountain of debt, it can seem like you will never see the light of day again. You make payments month after month, but the balances never seem to go down. You send $50 to your credit card company only to find that your balance only came down enough for you to buy a pair of flip flops, not the designer kind. Iâ€™m talking the $5 variety. You pay $700 to your mortgage company, but the amount you owe is just $60 less. What!?! Youâ€™ll never get ahead at this rate.
Interest is to blame for both of these scenarios as well as a hundred others. Once you buy something on credit, it can end up costing you 25, 50 to 100% more than what is on the price tag. For this reason, many debt reduction strategies focus on eliminating interest as a way to reduce monthly payments and overall debt.
Worse yet, once her balance goes down, the credit card company will reduce her minimum payment to ensure that they keep her in the cycle of debt. Debt reduction is most successful when these needless interest payments are eliminated. You can do this by consolidating high-interest debt into a lowinterest loan. This is the best option since it eliminates a huge portion of your interest payments instantly.
Why is interest so nasty? Part of the reason why interest is so damaging to your budget is that it prevents you from paying down your balances as illustrated by the previous examples. You see, interest is calculated according to what you owe. The following slide about credit card example will put it all into perspective:
If you canâ€™t take out a loan, you can eliminate interest by paying more than the amount that is on your statement. If you donâ€™t have any money to make extra payments, talk to your creditors to get your interest rate lowered. Even if you can afford to pay more, it is not a bad idea to ask for a lower rate.
If, for any reason, your minimum payment amount is lowered, continue to pay the amount that you are accustomed to. It will only help you get out of debt quicker. Once you get balances paid down, do not run them up again. Learn to pay for things without credit, and you will find that you have more money in your pocket because you wonâ€™t be wasting it on senseless interest payments.
Dan Cavalli is noted by the Aust Newspaper The Financial Review as one of Australia's Internets Untold Millionaires. He teaches people how to build businesses extraordinarily fast, make money, get rid of debt and turn money worries into infinite sources of cash. Get his famous introductory 20 FREE lessons eCourse about Making Money that over 179,000 people have studied and applied at: http://www.the-richest-manin-babylon.com
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