Tools for Taking Control: Using A Debt Calculator To Your Advantage
If you intend to eliminate your debt, one of the first steps is also one of the hardest: figuring out exactly how much you owe and what it will take to pay if off. Credit card companies have a perfect formula for keeping their customers on the hook as long as possible, providing a minimum required payment that ensures that it will take years to pay your balance in full.
Thanks to the CARD Act, your credit card statement now shows you how much you must pay to reduce your balance to zero within three years; how long it will take you to pay off your credit card if you only make the minimum payment and how much interest you have paid on the balance each year.
While those pieces of information are helpful, you may want to use a debt calculator to get a better handle on how to get yourself out of debt. Gather your most recent credit card statements to get started. First, though, take the pledge to stop using your credit cards immediately.
Three ways to use a debt calculator
A debt calculator can be used in several ways to set up your repayment plan.
1. Estimate your debt payoff date. Your first calculation should be to take each credit card bill and enter the current balance, the interest rate and the amount of money you typically pay on your bill. Hopefully, you're already paying more than the minimum due, but, either way, you need to know how long it will take to pay off each card. You can also add up all your credit card balances and average your interest rates and monthly payments to see when you will be debt-free with your current repayment plan.
2. Evaluate the impact of above-minimum payments. As part of the process of a do-it-yourself debt reduction plan, you should establish a budget. Look for ways to reduce your spending or increase your income so that you'll have extra cash to use to reduce your credit card balance. Next, use your debt calculator to see the impact of extra payments on your credit card bill. For example, if you have a $5,000 credit card balance at 17.5% and you currently pay $100 per month, it will take 90 months to pay in full. If you add $50 to your payment each month, you can cut the payoff time nearly in half to 46 months. Experiment with different amounts to see the impact of as little as $20 more per month on your repayment plan. In this scenario, you could pay your bill in full 25 months faster by increasing your payment as little as $20.
3. Calculate a payment to reach your preferred payoff date. An alternative way to use a debt calculator is to choose a specific date to become debt-free. This could be before a child starts college, before you retire or just within two or three years. You can plug in a date to the calculator and it will generate the payment required to reach your goal. For instance, if you want to pay off that $5,000 balance in the above example within three years, you would need to pay $179.51 each month. If you can't afford that, you can shift the date to 3 1/2 years and pay $160.04 each month.
The credit counseling experts at the National Foundation for Credit Counseling recommend paying at least double the minimum monthly payment on your credit cards, but if you can't do that, a calculator can help you set an appropriate goal for your repayment plan.
If none of these calculations produce results you can use to repay your debt in a reasonable time frame, if may be time to consult a credit counselor or to consider debt consolidation as a way to eliminate debt.