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The longer it takes you to get rid of debt, the more time you will spend paying interest on it. For example, if you have a $3,000 balance at an 18 percent interest rate and pay only a minimum $60 each month, it will take you 26 years to erase that debt. In the meantime, you will end up handing over a total of $6,863 in interest in addition to paying off the original $3,000 debt.
Raising your payment to just $100 every month allows you to wipe out your debt in in about three and a half years and slashes your total interest to $1,016. That’s why you should always attempt to pay more than the minimum due on any account. (Use this Federal Reserve calculator to see how changing your payment amounts can alter your situation.)
You may have even noticed some helpful incentives for paying off your amounts right on your monthly statement. Legislation passed a couple of years ago requires credit card issuers to disclose how long it will take consumers to pay off their balance if they only send in the minimum amount due each month.
In most cases, it can be sobering to realize how many months—or years—you will spend paying interest on your outstanding balances. In fact, 25 percent of consumers said that seeing those numbers made them pay more each month, according to the National Foundation for Credit Counseling.
If you have questions about budgeting, interest rates, debt management or any other issues related to your financial life, remember that your local CPA can help. Turn to him or her with all your financial concerns.
Copyright 2011 American Institute of Certified Public Accountants.