Sticker Shock

One of the nice benefits of the new credit card laws is the requirement that your creditors disclose exactly what the impact of paying just the minimum payment would be for your financial future.

And depending on how much you owe and/or how much your interest rate actually is, you may need to make sure you’re sitting down before you open your next credit card bill.

I try never to pay just the minimum amount. There are a few credit cards right now where I’m paying exactly that amount, by automatic payment. In the meantime, I’m using two different “get out of debt” strategies at the same time.

The first one involves creating a “snowball” effect that begins with paying off the very smallest debt you have. The theory is that being able to say that you’ve successfully paid off an account gives you such a good feeling that it will help motivate you to do the same with the next-largest account. So you take the amount you were paying to the now-paid account, add that to the amount you’re paying to the next-largest, allowing yourself to pay it off sooner.

There’s a lot of logic in that strategy, because there’s nothing like writing “Paid in Full” on a check or seeing it on a follow-up statement with a big fat zero in the balance column.

The snowball effect has gotten a few of my smaller accounts taken care of so far.

But here’s where my strategy changes a bit:  it just so happens that my largest bill is with a credit card that happens to have the highest interest rate of all of my bills.  I owe more than I’d like to, definitely more than I’m willing to admit here.  In any case, I’m taking the amounts I was paying to the few smallest accounts and adding that to the amount I’m paying to that big monster of an account.

When I got my most recent bill, the “minimum payment warning” section of the bill informed me that if I made only the minimum payment, it would take me more than two decades to pay off the card, and I’d end up paying almost three times the current balance.  On the other hand, by paying just less than 50% more than the minimum payment will see me pay off the card in literally a tenth of the time, and I’ll end up paying less than half of that 20+ year total.

With the snowball plan, I’ll be able to pay more each month than the amount it recommended, which means that it’ll take me less than three years to pay it off, at which point my worst bill of all will be taken care of.

Never to be revisted.

And believe me: unlike years past, this time, it is safe to say “never.”