If you’re looking for a good scare, there’s a new credit card debt payment calculator available from the Federal Trade Commission. This tool, while useful, actually underestimates the horrors of getting out of credit card debt. The issue with this credit card debt calculator is that it makes some bold assumptions that ultimately underestimate both the time and the cost of getting out of debt.
For example, using the FTC calculator, a person with $10,000 in debt on a credit card with a 14% interest rate will spend $2,996 in interest and need NINE YEARS to pay off their credit card debt.
Unfortunately, the reality is much worse, especially if a person only pays the monthly minimum. One reason for this is the assumption that a person will make equal payments of $500 per month, every month, for NINE YEARS and make no new charges.
In reality, most people will have a hard time coming up with $500 per month, especially if they are only required to pay 3% of the balance.
As disheartening as it may seem, it could take a person much longer than a DECADE to pay off $10,000 in credit card debt and the interest expense could easily be $5,000 or more.
That, dear reader, is the sad and unnerving truth.
Now, please don’t let this scare you. Facing credit card debt is scary, but necessary. And there are steps a person can take to reduce interest costs, especially in the short term. As the title of this website implies, making smart balance transfers can help REDUCE the COST of repaying credit card debt and REDUCE the TIME it takes to do so.
Here’s an example, using our balance transfer calculator, of how a person with $10,000 of credit card debt at a 14% rate can get out of debt with less pain and lower expenses.
Step 1: Transfer you balance to a credit card that offers a 0% APR for 1 year. While this will incur a 3% fee equal to $300, you will save over $1400 in interest over the course of one year. Once the fees are subtracted, you will have a net savings of over $1,000 during the next year.
If you pay $500 a month during the next year, your balance will be reduced to $4300 by the end of the year. You’d be halfway home already. Even if you only pay $400 a month, you’ll still eliminate close to half your debt in one year. Not nine.
Step 2: At the end of 1 year, transfer your balance to a different card that offers a 0% interest rate. This, unfortunately, was much easier to do during the past few years. However, people with very good credit may be able to do this. So, assuming you can get another year with no interest, you’ll only need to pay $400 a month and voila, you are out of credit card debt in two years.
Now, because it may be difficult to get a 0% rate next year (or perhaps next month), lets assume you now have $4500 in credit card debt at the same 14% interest rate. Using the FTC debt calculator, it will still take 8 years and cost over $1300 in interest to get out of credit card debt. However, this assumes a monthly payment of only $225. If you pay down your debt by $400 per month, you’ll be free of credit card debt in about a year and a half. Add in the year with the 0% APR, and the total time to get out of $10,000 in credit card debt is under three years. That’s a lot less painful and expensive then nine years.
0% balance transfers are an essential tool for consumers looking to get out of debt. Unfortunately, credit card companies are making it tougher to get 0% rates every day. However, if you act quickly and apply for a balance transfer credit card today, you can save yourself a lot of money, a lot of stress, and a lot of time.
Credit card debt can be nightmare. Belive me, I’ve been there. And I’ve gotten out. In the past five years, I’ve helped a lot of others as well. If you’re reading this, you’ve made the most important step: you’ve faced your credit card debt situation head on. The next step is to get it under control. And the place to start is with a 0% balance transfer. You can view details of these offers, apply online at our website, and start the process of getting out of debt today.
For additional information on current balance transfer options, please see the 0% balance transfer comparision section of Smart Balance Transfers.