Wednesday, December 7, 2011

What You Don’t Know About Debt Will Cost You

Responsible consumers faithfully make their debt payments every month, likely without questioning the real impact of those payments. Here’s a fact you may not know: if you’re only paying the amount your creditor or lender recommends you pay, then you may be paying for a very, very long time.

You don’t have to hire a professional to help you assess your debt and you don’t have to know dozens of complicated math formulas. You can evaluate your debt on your own, for free, using CNN Money’s Debt Reduction Calculator. All you have to do is enter your debt information, select a repayment plan, and click the calculate button. What you get is very valuable – and possibly shocking – information about paying off your debt.

Minimum Payment Payoff Plan

If you’re currently paying the minimum payments on your debts, this calculator will be extremely valuable. To get started, you need to know each of your debts, the outstanding balance, the interest rate, and minimum payments for each of debts. In step two, choose a debt reduction plan which, in this case, is the minimum payment plan. Once you click calculate, you’ll be shown the amount of time it will take to pay off your debt and the amount of interest you’ll pay when you make minimum payments. Very often, paying the minimum will cause people to pay up to 80% of the amount of their debt in interest!

The Impact of Paying More

If you want to get out of debt faster and save thousands of dollars on interest payments, you’ll have to spend more money per month paying off your debt. Whether you can pay a little or a lot, anything you pay above the minimum will help you make tremendous progress with your debt repayment.

Use the calculator’s Fixed Payment plan to see the result of paying $25 or $100 above the minimum payment. This may seem like a small addition but it will save thousands on a $10,000 loan. Or, if you can afford to put more toward your debt, plug that number in the calculator and see what you will get! Many people are surprised, and perhaps relieved, to see the difference that can be made with just a little extra added to their payment each month.

Get Out of Debt on Your Time

The third option with CNN Money’s calculator is the Debt-free Deadline. With this option, you can choose the amount of time in which you want to be out of debt and the calculator tells you the monthly payment that you’ll have to make to get out of debt by that time. So, for example, if you’re turning age 55 in three years and want to be debt-free by that time, the calculator will help you figure out what it will cost per month to make that happen. (Note that your credit card statements will include the monthly payment required to pay off your balance in 36 months.)

Evaluating your debt is an important financial step, especially as you approach retirement. If you wait too long, it may be much more difficult to repay your debt. While it may be painful to face the truth about your debt, getting the courage sooner rather than later is the key to securing your financial future.

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 hands-on debt relief strategies, debt relief services or credit repair.

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