The personal finance press is filled with articles on getting out of debt. Here’s the latest example. The article has some helpful advice. However, like most I’ve read on the topic, it misses the single easiest step toward ditching the debt, which is to fix your payments.
Here’s what I mean. Let’s say you have a $2,000 balance on a credit card. If you stop using your card and make the required minimum monthly payments, those required amounts will decline a little bit each month. No, that isn’t due to the generosity of the credit card company; it’s due to simple math. Your minimum payment is based on a percentage of your balance. If your balance is declining a little bit each month, your minimum required payment will decline a little bit as well – so little, in fact, that you may not even notice. Paying this declining minimum is what keeps you in debt for approximately… forever!
For example, let’s say the card on which you have that $2,000 balance charges 18 percent interest and requires a minimum monthly payment of 2 percent of your balance ($40 this month). If you make the declining minimum payment each month it’ll take you over 24 years to pay off that debt and it’ll cost you $4,400 in interest.
But if you can afford to pay $40 this month, you can probably afford to keep paying that amount every month. By fixing your payment at $40, you will be out of debt in just under 8 years and you’ll pay $1,700 in interest. Taking that simple step cut your payoff time by 16 years and your interest charges by $2,700 (You can run some declining minimum vs. fixed minimum scenarios here).
Of course, 8 years is still a long time, so it makes sense to add an extra amount to the fixed minimum. In the example above, if you double your fixed payment to $80 per month, you’ll be out of debt in less than 3 years. With this calculator, you can enter all of your debts and see how much faster you’ll be out of debt by adding various amounts to your fixed minimums.
The easiest step you can take toward fixing your debt problem is to fix your monthly payments.