Use Supplemental Income to Pay Off Credit Card Debt
Any type of debt represents a drain on your wealth. When you have debt, you are paying interest to someone else. But there are few types of death as insidious as credit card debt. The nature of credit cards, and the way your credit line revolves, means that you can be stuck paying interest to someone else for a very long time – instead of using that money to benefit you.
Why Paying the Minimum Always Means You Lose
One of the reasons that it is so easy to let credit card debt get out of control is the minimum payment. In many cases, you are only paying 3% or 4% of your credit card balance as the minimum. If you are paying a 3% minimum on a balance of $2,500, then your payment is “only” $75. It’s tempting to put money on your credit card because big ticket items suddenly seem “affordable” when you pay $75 a month, rather than paying a large sum at once.
The problem, though, is that a good chunk of that “affordable” minimum payment is going toward your interest charges, and not your principal. For a simple example, let’s say your credit card interest rate is 19.9% on that $2,500. Every month, you are paying $41.46 in interest. (You can figure this by dividing 19.9 by 12. You divide your answer by 100 to move the decimal over, and then multiply the result by $2,500 to arrive at a simple estimate of what your interest is.) This means that more than half of your payment is going toward interest and your new balance is $2,458.54. Your principal is reduced at a miniscule rate.
Paying off that $2,500 with the minimum will take four years and cost you an additional $1,169 in interest charges, according to a CNN calculator. What if you could pay off debt quicker?
Using Supplemental Income to Pay Off Credit Card Debt
While cutting expenses and putting the savings toward repaying credit card debt can give you a boost, you might be able to speed things up with the help of supplemental income. If you could find a way to generate an extra $125 a month, you could pay $200 on your $2,500 credit card debt. This would reduce your repayment time to one year and three months – and result in paying $325 in interest. You will save $844 in interest charges by using supplemental income to pay off credit card debt.
If you can generate even more income, you will be able to pay off your credit card debt even faster. Plus, using supplemental income to pay off your credit card debt means that you will not have to suffer a substantial drop in your quality of life in order to pay off your credit card debt.
Hopefully, though, your brush with credit card debt will have taught you a lesson. Make sure that you can afford items before you purchase them. Plan your spending, and increase your cash flow so that you aren’t getting into any more debt. Use your money for you.
Live in the UK? There is a useful credit card debt advice article on ThinkMoney.com here.