Photo: Steve Rosenbaum
From where you stand now, it probably seems like a long road to debt freedom, especially if you’ve been paying just the minimum up to this point.But, there’s some good news. By reducing your spending and putting that money toward your debt, you can shave a significant amount of time off your debt repayment.
Even better, you may be able to save thousands on interest paid.
Consider the Minimum
You may not realise it, but making the minimum payment on your debt will take the maximum amount of time and cost the most interest.
A recent copy of your credit card billing statement will show you the amount of time and total money you’ll spend paying the interest. If you want to see the impact across all your debts, you can use a credit card repayment calculator like the one at CNN Money.
Enter all your debts, the current balance, interest rate, and minimum payment. Then, choose the “Minimum payment” option and click the calculate button.
The result is the total time and interest paid across all your debts.
The Impact of Paying More
But what if you could put a little more money toward your debt.
You may already be living on a tight budget, but perhaps you could squeeze an extra $50 or $100 a month.
You can use CNN Money’s calculator to see the impact of the extra payment. Total your current minimum payments and add $50 to that amount.
Then, enter that amount in the “Fixed payment” section of the calculator to see the result.
Here’s an example.
Consider $20,000 debt at an average 18% and a minimum payment of 3% (or $600). Minimum payments would take 22 years and 1 month to pay off that debt and a total of $18,451.82 in interest.
Paying $650 each month would reduce the time to 3 years and 5 months and the interest to $6,577.13. That’s $11,874.69 in savings just by adding an additional $50 a month.
The key is to keep paying $650 every month, even when the minimum payment goes down.
(The minimum payment on credit card debt will decrease every month since it’s calculated as a percentage of your balance, which also decreases as you make payments.)
Coming Up With the Extra
The hardest part about making this happen is figuring out where to get the extra money. You may not be able to cut back in several different areas to come up with $50.
For example, you might eliminate DVR or premium channels to save $10 on your cable bill. You could downgrade your internet service to a lower speed and save another $10.
Take a defensive driving course could reduce your insurance rate. Make your own coffee. Read the news online instead of buying a paper.
There are dozens of ways to free up money for your debt. The key is to look at what you’re currently spending and find ways to spend less.
This guest post was written by Eliza Collins, a seasoned personal finance writer with professional experience in the debt relief industry. Eliza writes at the debt settlement blog where you can read more about debt, hands-on debt relief strategies or services.