Managing Credit Card Debt

Why Time Is Not On Your Side

The Rolling Stones were definitely not singing about managing credit card debt when they covered the Jerry Ragovoy song "Time Is On My Side" in 1964. And although it's hard to believe that it has been close to fifty years since Mick first sang those words, consider this which may be even harder to believe...

Let's say you had bought that record (no mp3's to download back then) in 1964 for say, $8, using a department store credit card with an interest rate of 19%. And, if every month from that time in 1964, you only made the minimum payment of 2% of the outstanding balance on your credit card, how long ago do you think you would have owned that iconic record free and clear?

The answer?

After 45 years of monthly payments you would still have about 5 years left until you had it paid off!

Aside: The minimum payment amount on your credit card is typically calculated as 2% of the outstanding balance or $20, whichever is greater. For the example above I assumed that the minimum payment was calculated as 2% of the outstanding balance every month.

The moral of the story is this...

managing credit card debt that has high interest rates, by making low monthly payments (the minimum balance or slightly above) is a recipe for disaster.

And if you follow this "recipe" you will still be paying for those new shoes you bought last week when you are retired. A sobering thought.

Time, And Managing Credit Card Debt

The longer you take to pay off your credit card debt, the more time you are giving the high interest rates on your cards to do what they do best. In other words, rob you of your money. Therefore, the key to successful credit card debt elimination is (and this may sound obvious) to reduce the amount of time it takes you to pay it off.

Obvious? Yes.

Easy? No.

Here are a couple of things you can do.

"Thing #1" For Managing Credit Card Debt- Create a detailed budget for yourself (or your family as the case may be). Start by figuring out exactly where your money goes every month, prioritize your spending, and then figure out where you can plug some "leaks" in your spending. For many people they are surprised that this simple exercise alone can turn up around 10% in cost savings. And this 10% can go directly towards reducing and eliminating your credit card debt.

Sidebar: Not sure where to start to get a handle on your money? If you need some help, I recommend you speak with a credit counselor who can assess your financial situation, prepare a detailed budget, and offer other options to help in managing credit card debt. Initially, they can also give you a debt cost savings estimate based on your unique situation.

Let's say your monthly net income is $3,000. An extra 10% in cost savings would be $300 per month. Let's also assume you have $15,000 in credit card debt at 19% interest and a minimum payment equal to 2% of the outstanding balance. Therefore, your next month's minimum payment is $300. If you just continued to pay the minimum each month it would take you 62 years and over $54,000 in interest charges before you pay it off.


If you were to do two simple things, ie. continue to pay $300 each month (instead of paying the minimum balance) and put the extra $300 you "discovered" through your budgeting exercise onto the credit card each month, here is what would happen...

Instead of 62 years, you would be debt free in about 33 months and only pay  a total of $4,247 in interest charges.

That sounds much better. And when you add the second "thing" you are really on your way to credit card debt freedom.

"Thing #2" For Managing Credit Card Debt - Reducing the interest rate on your credit card debt will also help towards reducing the time it takes to pay off your debt. If, using the above example again, you were able to reduce the interest rate on your credit cards to say 9%, the numbers look even better. ie. 28 months to pay off the credit card balance and only $1,673 in interest charges.

Not sure how to get your interest rates reduced? Well, you can always try speak to your credit card company yourself, or, if you were to enter a debt management program through a credit counseling agency, they would negotiate with your creditors on your behalf to get your interest rates reduced. Sometimes as low as 5%. They can also get late payment penalties and over limit fees eliminated at the same time.

Managing credit card debt really comes down to managing time. And getting "time on your side" should be the first thing you focus on.