Finding additional ‘cash’ from what you already have

Doug Horn

Every year most of us go about our lives like we always have. Doing the same thing over and over, mainly because that is how it has always been done. Part of the new banking regulations passed by Congress is now providing information that most of us have never seen and it may change how you spend your cash.

Everybody with a credit card account is now seeing additional information on their monthly account statement. Even if the statement is normally paid in full each month, information on the time required to pay off the current balance if the minimum payment was made is now provided. The statement also shows the payment amount to pay off the balance in three years. It is very surprising of the impact of just a few more dollars each month can have on the time required to pay off the account.

Paying off an account in three years rather than 20 or longer can improve a family’s standard of living once the credit card payment is no longer needed. The minimum payment on a credit card changes based upon the balance on the card. While it does increase when the account balance is increased by additional charges, it also goes down as the balance is paid off. As the account balance is reduced each month, the bank is also lowering the minimum payment required. For those customers who generally pay just the minimum payment, this will allow the bank to keep most of the balance on the books collecting interest for a very long time.

For an account with an $8,000 balance the minimum payment may be $177. By paying $256 monthly (an extra $79 per month) for three years the balance would be zero provided no new charges were made and $7,000 or more in interest would be saved.

Banks are also making billions it seems in overdraft fees. According to Moebs Services, banks may collect $35.2 billion in overdraft fees during 2010 alone! By making sure the checking account is reconciled monthly and better attention is paid in order to avoid writing a bad check, some of this $35.2 billion might stay in your pocket rather than the bank’s.

For those wanting to be free of their credit card debt sooner rather than later, and thus be able to use what used to go to the credit cards for improving their standard of living or adding to investments, following these steps and this goal can be achieved. First determine the minimum monthly payments for all of the debt. That amount will be paid each month even if future minimum payments are reduced. Then, determine how much extra can be paid every month without fail and allow you not to charge additional expenses on the accounts. This figure will become the amount paid every month until all of the debt is gone.

Next, to avoid adding balances to the cards, everyone needs an emergency fund. If you do not have one, it has to be created first. So pay only the minimum payments for as many months as necessary with the extra payment going into a savings until the desired balance is created. Life always throws curve balls every once in a while and if the emergency fund is not there, one five hundred charge can wipe out ten months of balance reductions.

Once the emergency fund is built, it is now time to shift the extra payment amount to the cards. The card with the lowest balance should be focused on first. Their minimum payment will be the smallest, but the extra payment will allow the card to be paid off very quickly. The same amount will be paid each month until this card’s balance is zero. Once the first card is paid off, that payment amount will now be added to the amount being paid on the next card. Attacking the debt in this manner has a snowball effect. As each card is paid off, the amount being paid on the next card now includes what was being paid to the cards that now have a zero balance. Once the cards with small balances are paid, then focus on the cards with the highest interest rate.

Keeping the amount the same will permit the goal to be reached so much more quickly. Once the balances are gone, the funds used to pay off the debt can now be used to build investments, meet future expenses such as college for children, as well as improve the standard of living.

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