Minimum card payments are not your friends

By Ben Woolsey and Emily Starbuck Gerson

For many Americans, it's common to overspend -- and to use a credit card to do so.

It is also common to make minimum payments to keep credit card companies at bay for another month. But that option became more expensive in 2005 when federal regulators advised issuers to set minimums to allow consumers to pay off their balances in "reasonable" time, which they suggested was between seven to 10 years. At the time, the industry standard minimum payment was 2 percent of the total debt, including principal and interest. For most, that minimum barely bit into the principal balance.While the Fed allowed issuers to set their own minimums, many adopted a "1 percent plus" policy, in which each monthly payment covers 1 percent of the principal balance, plus interest and any fees.

Stop digging a hole
Even with higher minimum payments, paying off a debt can still take many years. To shorten the payoff period, aggressively attack the debt principal; don't just service the debt with minimum payments.

For any debt payoff plan to work, consumers must address the core problem and stop living beyond their means. The best approach is to stop using credit cards for new purchases and transfer the balances to a low interest credit card. Then begin aggressively paying down that new credit card (which you should not use for new purchases, either).

Avoid carrying a balance
Brad Stroh, Co-CEO of Bills.com, says consumers should strive to pay off their balances each month. "We cannot repeat this often enough," Stroh says. "This is the key to avoiding credit card debt. Consumers never should carry a credit card balance. If necessary, use a debit card instead of a credit card so that balances cannot accumulate." Without the burden of interest payments, coupled with a little financial self-discipline, you will be amazed at how quickly you will find yourself becoming debt free.

What if you think you really need all those existing credit cards to get through life? Having a wallet full of high interest credit cards is not a good idea for anyone -- especially someone in serious credit card debt. "To manage personal business, most adults need to own at least one credit card," Stroh says. "Multiple credit cards are just not necessary." Keep one in a drawer for emergencies if you can't bear to let them all go.

Set a budget
When it comes to financial self-discipline, a helpful first step is to keep track of everything you spend for 30 days. "Write down all expenses in two categories: necessities, such as housing, food and clothing, and extras, including designer clothing, movies, dinners out and lattes," Stroh says. This can be a very illuminating exercise because it will show you how much money you waste each month on unnecessary purchases.

By eliminating a few daily expenditures -- whether by skipping the infamous daily double latte or eating lunch at your desk instead of going out -- you can save a lot every month.  Stroh suggests once you've mapped out your expenses, "allocate a weekly budget for extras, and if you go over, cut yourself off."

If you can further discipline yourself to apply these savings to your credit card debt, which should be transferred to a 0 percent APR credit card, you can become debt free in record time.

To comment on this story, write editors@CreditCards.com.

Published: May 10, 2006

	Three most recent Credit account management stories: Credit card issuers' customer service phone numbers, websites – This is a list of customer service phone numbers and websites for many of the nation's top credit card issuers ... 5 reasons you don't really want to win all that lottery money – While it's fun to daydream about it, winning a lottery fortune comes with risks, responsibilities and a flood of moochers, fakers and false friends ... Lost your credit or debit card? Want it fast? Expect to pay – As banks look for new ways to make money, some have started charging to replace lost credit or debit cards. Want it in a hurry? It'll cost even more ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!