Articles - Archived Feature

Breaking the Cycle of Credit Card Debt

Making more than the minimum payments

Racking up credit card debt sure is easy. It's getting rid of it that's an entirely different story. According to creditcards.com, the average credit card debt per household at the end of 2008 was $8,329. That's not to say credit cards are bad. In fact, they are a powerful financial tool that, when used correctly, help consumers establish a positive credit history, provide convenience, allow for telephone and online purchases, and make for a reliable source of funds in case of an emergency.

One drawback to credit cards, however, is that many consumers tend to get stuck in a cycle of debt. But it doesn't have to be that way. One easy way to ensure your balance will go down in a timely manner is to make it a habit to always pay more than the minimum payment. Unfortunately, even if you make all your minimum payments on time, you are still doing very little to reduce you card balance. Let's look at the following example:

Say your household has the average credit card balance mentioned above of $8,329. Assuming your card carries the current average national credit card interest rate of 11.37 percent with a minimum payment equal to three percent of the balance, the minimum payment each month would be $250. If you only made the minimum payment each month, not only would it take you 12½ years to pay off your debt, but you would end up paying $3,633 in finance charges. However, by adding another $50 a month, that 12½ years would be reduced to 5¾, and finance charges would be reduced to $2,185. Make it $100, and the balance will be paid off in a little more than 4 years, with finance charges equaling $1,625.

With on-the-spot financing available for everything from furniture to electronics, it's not just major credit cards getting people into a cycle of debt. Store cards that tempt consumers with low introductory interest rates, low payments and no money down are also a contributing factor. In the end, many consumers end up thinking of a store purchase as a monthly payment, therefore only paying the minimum each month. When this happens, they set themselves up for a long repayment plan, plus additional costs in the way of interest.

It's understandable that when times get tough, the only option may be to pay the minimum payment on a balance. But try to make this the exception rather than the norm. As you saw in the example above, just paying an additional $50 a month can save you significant money in the end.

Also, when shopping for a credit card, keep in mind Local Government Federal Credit Union's (LGFCU's) Visa Credit Card. Our minimum payments equate to 3 percent of the outstanding balance, or $25, whichever is greater. However, members can elect to increase that percentage to 4, 5 or 6 percent of the balance. This is specifically so they will be required to pay more, thereby helping them stay out of the cycle of debt. Just another way LGFCU looks out for its number No. 1 asset: its members!