How To Pay Off Your Credit Card


Monday, July 3rd 2000, 12:00 am
By: News On 6


Q: How much longer will it take me to pay off my credit card if I only make the minimum payment each month?

A: If you only make minimum payments, it will take you much longer to pay off your balance than if you regularly chip away at your debt by paying more.

The reason is simple enough: Credit card companies are trying their hardest to make as much money off of you as they possibly can. One way they do this is by lowering your minimum monthly payments as your balance decreases.

That lengthens the time it will take you to pay off your loan, resulting in more interest payments. And if you're ever late or go over your spending limit, fees are tacked on and your interest rate can go up, meaning that less and less of your monthly payment is actually going toward paying down your balance.

Myvesta.com, a non-profit organization that provides advice to consumers about credit and debt issues, says that keeping up a constant rate of payment instead of only paying the minimum required amount will make a big dent in the amount of time needed to pay off a balance.

For example, if your rate is 17.99 percent and you've got a balance of $1,500, your initial minimum payment will be about $35. If you keep making smaller payments as the minimum goes down, it will take you just over 30 years to pay down the balance and it will cost you $4,172 in interest, according to Myvesta's calculations.

On the other hand, if you keep making $35 payments each month throughout the life of the loan, you would pay off the balance in almost 8 years and pay $1,506 in interest — a big difference.

``The minimum monthly payment is not designed to get you out of debt as fast as possible,'' says Steve Rhode, president of Myvesta. ``It's designed to make the maximum amount of profits for the credit card issuers, and they do that by charging fees and interest that you agreed to.''

Rhode advises credit card users to carefully read their statements each month to see exactly how much of each payment is going toward paying down balances and how much is going toward interest and fees.

Rhode says credit card issuers have been lowering their minimum monthly payments over the past several years, shortening the grace period allowed for making payments, and raising fees for late payments and exceeding credit limits.

Minimum payments used to be about 3 percent to 4 percent of an outstanding debt balance, but over the past few years, credit card issuers have been lowering the amount to about 2 percent, Rhode says.

What's more, the rates on credit cards and other kinds of loans have been rising over the past year as the Federal Reserve raises short-term interest rates.

Free spending by consumers has been showing up in sharply increased debt amounts. According to Myvesta's analysis of data the Federal Reserve put out in January, the median amount of total debt owed by families increased 42 percent from 1995 to 1998, from $23,400 to $33,300.

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On the Net:

www.myvesta.org.