So, the Feds have increased the interest rates- finally.  Which really means that for those of us carrying credit card debt, our costs are going to go up.  (Our interest rates are going to rise, that’s why!) Which also means now is the time to develop (and follow)  a plan to reduce our debt.   In the most expeditious way possible.

Let’s go back to my old example- a list of debts and the rates charged.  (You can use this as a template to make a list of your own debts and rates charged.) .

The first problem is that credit cards (and other vendors) have different methods of computing minimum payments.   The choices are the percentage method or the percentage+interest+fees  method.

The percentage method chooses something between 1% and 3% of our total balance as a minimum payment.    A 3% minimum payment assures that we will pay the balance due in 33.3 years- if we don’t use the card further- and have no additional interest charges.  So, really that means we will pay down the debt in closer to 40 years.

The percentage-interest-fees method means we will pay that same (range of) total balance due, plus the interest that was charged this month, plus any fees (annual fees, late payments, etc.) In this case, assuming  we charge nothing new on the cards, you will pay more than minimum payment above (since we are paying the current monthly interest); the balance gets paid in about 33 years (dependent upon the interest rate charged)  under this program- if we only pay the minimum payment.

I am sure you can immediately see the problem with minimum payments.  We will never get out of debt if all we pay are the minimum payments.

The trick is to pay the debt that has the highest interest rate imposed upon us.  (This is more important as the interest rate charged increases; many folks who experience cash flow problems have significantly high interest rates imposed on their credit balances.)

Yes, it’s true, we won’t see an entire bill disappear quickly.  But, think of this trade-off.  Would you rather see that $ 1000 bill be paid off in 4 months, or paying off the $ 5000 bill first, which takes 16 months- but that also means you saved at least $ 250 over the 18 months.

We also need feedback to see how we are doing.  So, we  need to do to post a graph of our debt balance each month.  In so doing, we will see – graphically- how our debt is being attenuated.

And, we all will be suitably motivated.

Before our credit rates go sky high!