Debt Reduction - Don't fall for the minimum payment due

Credit card debt is one of the most expensive, and hence, most difficult debts to overcome.  One of the most misunderstood aspects of credit card debt is the minimum payment, or "minimum amount due".  Many, if not most, consumers think that paying the minimum payment on their credit card bills is the best practice, and if they do so, their credit card balances will be paid off in a reasonable amount of time.   What they don't know is that credit card debt, on average, takes three times as long to pay off as a conventional loan.   A balance of $2500 could easily end up costing $10,000 or more once it's finally paid off.

The credit card companies use a couple of different methods to decide the minimum amount due, either a percentage of your overall balance ( perhaps 2% ), or dividing your current balance by a fixed number of month, like 48.   That is, of course, a bit misleading, as it implies that the balance might be paid off in 48 months, which is far from the truth. The truth is that the formula for calculating your minimum payment is calculated to be to the credit card companies advantage, not yours.  There are a variety of "tricks" they employ to continue to keep the advantage in their court, such as reducing the minimum payment as you pay down the balance.

So, since the system seems skewed to the credit card issuer's interest, what should your strategy on payments be?  There are a couple of key strategies you can employ to shift the advantage in your favor:

1. No matter what, don't just pay the interest and finance charges.  Your credit card statement clearly shows what your interest and finance charges for the month are.  When deciding how much to pay each month, ensure that you are making a dent in the overall balance.    It's not unusual for the minimum payment to be just a few dollars more than the interest and finance charges, which will put you in a situation where the overall balance never goes down.

2. Don't decide one credit card at a time.  Look at the bigger picture, and consider all of your credit card debt, across all the cards you use, at the same time. Then, you can prioritize which debts to make additional payments against.  You might consider creating a chart that outlines your strategy.  For example, if you have decided that you can afford to pay an additional $200 a month above the minimum on all your credit cards, you could then decide how best to spread those extra payments across all of your cards.   Prioritize the higher amounts to those cards with the highest interest rates and finance charges.  But, don't forget rule #1, and always at least pay a little more than the minumum on each card.

 3. Make your payments on time.  Falling behind on payments creates a vicious circle that is very difficult to escape.  A delayed payment that results in a late payment fee means that even less of your payment is being applied the outstanding balance.

4.  Transferring balances doesn't count as a payment.  There are valid reasons to transfer a balance from one credit to another, and it's wise to move money out of high interest rates cards. That said, many consumers make the mistake of counting that balance transfer as a payment.  Further, those in desperate financial situations are tempted to make the payment for one credit card using another credit card. Beware this practice, as you are effectively skipping payments.  This practice actually makes things worse, as not only is the balance not coming down, it's actually rising.  Making a payment with a credit card creates a shell game where the finance charges just move from credit card to another, adding to the overall balance.