Sofia Did the Math – It Was Time to Change
What does $5,000 of debt mean? Like many, Sofia didn’t think much about her credit card debt. She paid her monthly minimum payment on time and gradually saw her balance reduced. However, she was shocked when she realized paying just the minimum meant paying down her debt would take nearly 15 years and cost $7,500 of interest — in addition to the original $5,000! Here’s what she learned.
Pay more than the minimum. What got Sofia into trouble was just paying the minimum every month. Credit card companies know offering a low monthly minimum payment is enticing to many and more comfortable when a rush of bills come every month. However, as Sofia found out, this also means you may be paying off a small balance for 10-15 year, and maybe more! Worse yet, the longer you owe money to the bank, the more money you pay in interest.
When possible, try to lower your rate. Sofia’s credit card had an interest rate of 23.99% which caused her to pay much more interest than many of her neighbors. Like them, she received many credit card offers in the mail from cards offering 0% introductory rates, to cards offering low fees to transfer balances. For example, if she is able to find a card offering her 18.99%, she has the potential to save $1,500 of interest over the time it takes to pay off her debt. Wouldn’t you love an extra $1,500?!
Small changes can make a big difference. As you reduce your credit card balance, credit card companies tend to lower your minimum monthly payment. Sofia decided that she would pay $150 per month until her debt was paid which near the end meant paying nearly 2x the minimum! While this might sound difficult or impossible, this small change meant Sofia could pay off her credit card debt in under 5 years and save over $4,000 in interest.
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