Bust Out of Minimum Payment Mode
By: Brian O'Connell

Paying the minimum amount on your monthly credit card tab is like running on a treadmill – you may feel better for a while, but you’re certainly not going anywhere. Here are some key moves to make the break the minimum payment habits – and save you big bucks in the process.

First, some background. U.S. consumer credit card balances have risen, on average, by $10,679, according to the Nilson Report.

Additional studies show that credit card carriers are tightening credit limits at a time when U.S. households are increasingly dependent on their plastic to get them through the month, financially.

According to the U.S. Office of the Comptroller of Currency, 68% of card carriers have tightened card underwriting standards in 2009 – that’s up from 35% in 2008. Another study from Demos reports that more than one-third of low and middle-income households used credit cards to cover basic living expenses (including rent, mortgage payments, groceries and utilities) on average in five of the previous 12 months, from 2008 to 2009.

In such a tough credit environment, talk of hiking your monthly credit card payments may seem, as the saying goes, irrationally exuberant. But the fact is, if you can make more than your minimum credit card payment, you’ll save money in the long run by paying less in interest fees and you’ll also pay off your card debt much faster.

For the record, the average minimum credit card balance has historically been set at around 2% of the consumer’s entire monthly balance. In 2009, as credit tightened and card issuers battened down the hatches, those minimum payment levels doubled to around 4%. Card companies hike minimum payment levels to get card holders to pay down debt faster.

Also, know that it can take years to pay off even a nominal credit card balance if you only pay the minimum balance each month. Consider a $1,000 card balance with an 18.9% interest rate. At about 2%, your monthly payment is around $20 (of that, about $12 goes to finance charges and $8 to your actual principal balance amount). At that rate, it would take you almost 22 years to pay off the entire debt.

How can card customers do better? Try these tips:

Look at purchases differently. Don’t look at the cost of that big screen TV – or even that $20 steak – based on what you see on the price tag. Instead, look at the price based on the monthly payment on your credit card. Through that prism, a $20 steak can become a $60, $80 or even $100 steak, depending on how much money you plow into your monthly card payment.

Play the “imagine” game. John Lennon was on to something big, obviously. But you can turn “imagine” into a card-debt reducer fairly effortlessly. Instead of seeing the actual $25 minimum payment on your card bill, double your vision and imagine it’s $50, instead. Use that as your basis going forward – or even hike it, if you can.

Take an opposite view. Don’t look at the minimum credit card payment as the credit card company’s number, look at it as your number. In other words, pay no attention to the minimum credit card digits on your card bill. Instead, pick a higher number that accommodates your budget but balances it with your desire to pay down your card debt faster. If, for example, you can survive the month without an extra $100 or so – apply that $100 to your card amount – and watch your card debt dwindle.

Beating the minimum credit card payment syndrome is really an issue of mind over matter. If you can look at your card payments on your terms, and not on the card company’s terms, you’ll turn the tables in your favor.

—For a comprehensive credit report, visit the manybanking.com Credit Center.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.

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