Understanding Credit Card Debt
Understanding Your Debt Situation: Get Savvy
Before you can accurately resolve a problem, it’s always best to first have a clear understanding of what you’re dealing with. That is most definitely the case when you are evaluating your debt situation and deciding on possible debt solutions . Most consumers pay the minimum balance on credit cards not knowing what percentage is going to principal or how many years it usually takes to pay off credit cards that way.
So before you swipe that credit card again, it’s time to look at your credit card bills in a different light. Here are five simple steps that require you to determine five figures that you need to know in order to start off your quest to pay off debt successfully.
1. First Determine Your APR and Balance. Have you ever really taken the time to look over your credit card statement? If no, then now is the time to start. Yes, it’s a little scary to face those numbers head on, but if you’re going to get serious about your debt reduction plan then you have to get extremely familiar with your credit card bills . Scan down to the section of your bill that discusses your finance charges (sometimes called the Finance Charge Schedule); you are looking for your Annual Percentage Rate (APR), which is the actual cost of the credit you are holding with that particular credit card company. There may be more than one APR listed depending on your credit card agreement, such as special balance transfer rates and cash advance rates. Write your APR down for each category and credit card bill and move on to the next step.
2. Determine Your Balance. Now you want to find out the credit card balance that your credit card company uses to compute your finance charge. Most will go by the average daily balance, while others use a Two-Cycle Average Daily Balance (based on two billing cycles), previous balance (the balance at the beginning of the billing cycle), or an adjusted balance (purchases made in that billing cycle are not included). The balance computation method that your credit card company uses has an effect on how expensive your monthly finance charges will be. When you have different balances connected to certain APRs, this is where things can get a little complicated, but you can handle it! You will do a separate calculation for each balance and its corresponding APR later. Call your credit card company if necessary and ask them questions about how they compute your balances to be sure you’re both on the same page.
3. Calculate Both Your Monthly and Daily Finance Charges. Next, you will want to determine how that APR translates to dollars and cents. Use the following simple formulas:
o Your Monthly Rate: APR ÷ 12 (months in the year)
o Your Daily Rate: APR ÷ 365 (days in the year)
So in this example if your APR is 20%, your monthly rate will be 1.67% and your daily rate is .055% (these are two numbers that you will want to memorize for future reference). In order to figure what these percentages mean monetarily on a monthly and daily basis, you simply move the decimal point over twice and multiply the resulting number by your average monthly balance. So if your current average credit card balance is $10,000 this month here is what you will do:
o Your Monthly Rate: .0167 x $10,000 = $167 per month in interest
o Your Daily Rate: .00055 X $10,000 = $5.50 per day in interest
This is what you are paying on both a monthly and daily basis for the credit card debt you are holding. Some credit cards will calculate your monthly finance charges based on the monthly rate, and some on the daily rate. *Remember, your average balance will change every month since you are paying it down with principal, so you will need to do this calculation every month to be accurate.
4. Decide How Much You Should Be Dedicating to This Debt. Now that you know how much you are paying every month towards interest, you can now decide how much would need to be dedicated to paying off the debt. How much principal should you pay off on a monthly basis in addition to the interest you calculated above? This decision should be made in correlation with the next and final step.
5. How Long Will it Take You to Pay Your Credit Card Debt Off? Finally, you must decide how long you want to continue to pay off credit cards . Alternatively, you can work backwards and decide how much you can dedicate to the debt each month, then calculate how long it will take you to eradicate the balance based on that figure. Simply put, if you have $10,000 in credit card debt with a 20% APR, as in our example, and only pay the minimum payment each month, which is now anywhere from the interest plus 1% of the balance and 4% of the balance, you could be paying off this credit card debt for over 80 years! If that doesn’t sound feasible for you, then it is definitely time for an alternative plan of action on your part, such as credit card debt settlement .
Once you know these five important figures, you can then go about deciding on debt solutions that will actually help you pay off credit cards that have been haunting you for years. Or course, these calculations can be done with an online credit card calculator, but it’s best that you have a close and regular relationship with how your monthly credit card bills are being computed. It helps make your goal of debt reduction more tangible.
If after doing these calculations you find that based on your current financial situation you are destined to be paying credit card bills for the next 80 years of your life, then it’s time to look at alternative debt solutions . The online debt consolidation experts at www.NetDebt.com will help you take that bold step towards eradicating your credit card debt much more quickly by shaving your debts sometimes in half, and paying them off in full for you.
When you sign up with NetDebt.com , it’s important that you understand something first. Eliminating credit card debt is about more than just putting money in a credit card debt settlement account. It is up to you to make a conscious decision that you are going to stop using those credit cards, and start getting serious about debt reduction . Are you ready for this commitment? If your answer is a resounding and confident “YES!,” then it’s time to take action.
NetDebt.com saves you the sometimes embarrassing process of having to explain all of your financial woes to a counselor. All you have to do is fill out the easy online debt consolidation questionnaire to get started on the road to being debt-free for the first time in a long time!
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