Financial Fixes: How to Get Out of the Minimum Payment Vortex
By: Nickelle Leist and Elise Kensinger
Did you know that U.S. households carry nearly $7000, in revolving credit card debt from month to month?1 By making only minimum payments and piling new debt on top of old, many of us start each month in the hole. We shoulder constant financial pressure that causes anxiety and prevents us from living confidently.
THE PAYCHECK GAP
To make matters worse, we may be only one missed paycheck away from being unable to make any payment at all. If you’re out of work due to illness or injury, even the minimum may be impossible. That’s why it’s important to take a two-track, protection-first approach to tackling credit card debt, and bridging any gap in your income.
PROTECT YOUR REPAYMENT POWER, FIRST
Yes, this may go against a lot of current thinking. But, hear us out. Millennials are intensive users of credit cards, already. Over 80 percent use credit cards, and about half have three or more cards.2 A significant majority are making minimum or incremental payments as it is.
THE LIKELIHOOD OF DISABILITY
Couple that with the reality that one in four of today’s 20-year-olds will become disabled in their lifetime, and the need for income protection becomes obvious.3 Disability income insurance can be a highly effective and affordable way to help protect a portion of your income so you can keep meeting your repayment responsibilities.
THEN, PROTECT YOURSELF FROM ADDITIONAL DEBT CREEP
Making minimum payments is only good for one party, the credit card company. Consider this: If you pay just the monthly minimum of $100 on a credit card balance of $5,000, it will take 22 years to pay it off — and you’ll have shelled out $5,887 in interest!4 Here are some steps to get out of the minimum payment vortex and minimize that incremental debt that comes from interest charges.
BREAK THE PATTERN
It goes without saying, but let’s say it: if you can’t pay your credit card balance in full each month, give your card(s) a time-out. But, but, you say, it was an emergency and we needed to buy a [fill in the blank]. Go directly to the next step.
BUILD AN EMERGENCY FUND
Think protection-first when allocating your budget and make a monthly contribution to an emergency savings account. Then if unexpected costs hit—such as car repairs and medical bills—you can pay in cash. Worried you can’t squeeze out money to build a fund? Take the Cash Stash Dash to discover your hidden reserves.
ATTACK YOUR BALANCE TACTICALLY
Concentrate on the highest interest card(s) first. Apply as much extra as you can to that balance and pay the minimum on your other cards. If you have two or more with same interest rate, go after the smallest amount first so you get a quicker win. Knock them off one at a time and celebrate each victory!
If you’re struggling with credit card debt and want to take your personal finances to the next level, consider talking with a financial professional. Together you can set up a practical plan to protect your income, relieve your debt burden and boost not only your financial, but also your emotional, confidence.