Have you ever noticed that almost all of your minimum credit card payments go toward finance charges? Even with the newer minimum payment calculations adopted by credit card issuers in 2006, normally only a small portion of your payment goes toward the principal balance.
Every month that you make a minimum credit card payment, your balance will only drop by 1%. If you are still using the card, then your balance will likely increase rather than decrease. If you are able to reduce your balance, then your minimum payment will also drop. Unless you keep your payments higher than the minimum payment, it can take 10 to 20 years to pay off some credit card balances.Most credit cards calculate your minimum payment as an amount sufficient to pay the finance charges and fees assessed on the account for that month, plus 1% of the principal balance. That means that your balance would only drop by 1% if you made a minimum payment.
Debt Management Plan using minimum credit card payments
If your credit counselor feels that you could benefit from a debt management plan, you will receive a tailored plan that is designed to give you immediate debt relief with a planned payoff within three to five years. The key is that your balances can be reduced much faster when your finance charges are reduced.
Creditors that agree to reduce your rates allow you to increase your principal payments, often while making a smaller minimum credit card payment. Your payments are geared so that if one account gets paid off early, it helps to further reduce the time for paying off one of your other accounts.
Your debt management plan is designed so that you can make a lower consolidated payment, pay much less in interest and make steady on-time payments until your debts are eliminated within three to five years. Imagine no longer having to make those minimum payments every month.