With Credit Card Debt, Consider the Big Financial Picture

Any solid debt-to-income formula is a good starting point in determining where you stand financially with your credit card debt. However, you can't allow yourself to be concerned only with your month-to-month budget. You must also think about the future, because your ultimate goal is to be debt-free. Thinking only in terms of months will slow the progress of your balance reduction plan.

Trapping yourself into paying only the minimum amount on your monthly statement is one of the worst things you can do. Typically the minimum payment is between two and three percent of the total balance or $10, whichever is greater. For a balance of $5000, this equals a $100-$150 payment. Not bad, right?

It may not be that bad if you're fortunate enough to have a low-interest credit card. Remember that interest is added to your balance every month. If you have a high-interest card, say 18% or more, a large part of your $150 payment will be applied to the finance charge, instead of paying off your principal balance. More of the minimum payment will go toward balance reduction for low-interest cards. Check your statement or call your credit card company to find out what your interest rate is.

Example: Let's say you have a $2000 balance on a card with a 19.8% interest rate. Assume you have a two percent minimum payment amount, or around $40. Remember that if all you pay is the minimum and you do manage to lower your balance over time, the minimum required payment will decrease as well, since it is a percentage of the total balance. In this example, the minimum will not stay at $40 until the balance is paid off. By paying only the minimum every month it will take over 25 years to pay off the balance. In addition to the original $2000 balance, you'll pay $5844 in interest charges!

Consider the biggest picture: what is everyone's ultimate goal during their working years and the one thing they look forward to? Retirement. And what are the two things you need to enjoy a comfortable life during your golden years? One, to have saved a large enough nest egg to make retirement worry-free, and two, to be debt-free. Imagine paying off all of your unnecessary debt long before retirement age and saving all that extra cash!

If these two goals aren't met well before retirement age, your golden years may not turn out at all as you picture them. It's heartbreaking to see people who are obviously past retirement age working as cashiers, store greeters, and fast food servers when they should be spending time with family, traveling, and simply enjoying life. Today's generations are fortunate to have more financial information and options available than ever before. We can avoid the need to work into our sixties and seventies just to survive, but it takes some planning. It's fine if older people want to work, but it's unfortunate when they're forced to.

To achieve financial security, you must grab hold of your finances as soon as possible. Credit card debt is a vicious cycle. But don't despair; the cycle can be broken and a promising financial future can be yours. All it takes is planning, discipline, and the will to be debt-free.