American Debt Solutions, a Non-Profit Credit Counseling Agency

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Why You Should Get Out of Debt Now!

If you are suffering from the burden of too much credit card debt, you need to consider your options now. Let us take a moment to show you how credit cards actually work.

Let us assume that you have a zero balance on your credit card at the start of the month. Let us also assume that you charge $4,000 worth of items during the course of the month. If you pay your full balance, you are actually winning the credit card war against the company that issued you your card. Here's why.

Since you paid you bill on time, you would have effectively received an interest free loan of $4,000 from the credit card company. If you had to go to the bank (not a credit card company) to borrow the $4,000 to cover your purchases in full, they might have charged you an interest rate of say, 7.5%. This means that you would have paid $300 in interest if you borrowed the money for the whole year or $25.00 if you borrow the money for one month as we illustrate in our example.

What this means is that if you pay your credit card bills on time EVERY month, the credit card company is effectively paying you to use their credit card. This does not, of course, account for the annual fee that many credit card companies charge as well. However, if you do pay your credit card bills on time, you will at least break even on the use of your credit card over the course of the year.

Most of us do not pay our credit card bills on time. Unfortunately, we do not live in a perfect world. Wouldn't it be great if each and every month, you paid your credit card bills on time? Of course it would. However, there are a number of reasons that we may not have the financial resources to pay our bills in a timely manner. These reasons include unexpected illnesses, job terminations, divorces, death, weddings, special events, vacations or simply over spending.

No matter why you didn't pay your credit card bills in a timely manner, you simply must get out of debt now! Let's see why.

How the credit card companies work.Let us assume that you that you have the same $4,000 in debt at the end of the month and choose only to make the minimum monthly payment instead of paying the bill in full as we have discussed. Typically, interest on credit card debt ranges from 18 to 24% per year. In fact, credit card debt is probably the most expensive form of debt that there is. For purposes of our example, let us assume that your credit card company charges you interest of 20% per year.

In addition, to get a full understanding of your situation, you need to know how most credit card companies calculate your minimum payment.

Most credit card companies calculate your minimum payment at 2.1% of the total debt outstanding. Using our example, you have a total outstanding of $4,000. This means that your minimum payment to the credit card company will be $84. Of this $84, $66.67 goes to interest and the remainder of $17.33 goes to actually paying your debt. This means that only about 21% of your total payment will actually go towards paying down your debt. This is why it takes you so long to get out of debt. Most of your monthly payment goes to interest and very little goes to principal. Please note that we are assuming that you make NO FURTHER charges on your credit card. If you do, your problems will only get worse.

Your problems do not end here. As bad as the previous scenario may seem, your problems do not end there. Because of the way that the credit card companies actually calculate their minimum payments, it is virtually impossible for you to get out of debt if you only make the minimum payment each month.

The reason is because the 2.1% minimum payment is calculated on an ever (slightly) decreasing balance. This means that you will always be paying the same percentage of principal to total payment each and every month. In our example, this percentage of principal to payment was 21%.

Because you are paying 21% of an ever (slightly) decreasing balance, your balance will take many years to drop to zero. I assumed that when your balance was reduced to $100, you would pay the balance in full. Under this assumption, it would take you ALMOST SEVENTY ONE YEARS to pay of your credit card debt and you would PAY THE CREDIT CARD COMPANY AN ADDITIONAL $15,000 IN INTEREST IN THE PROCESS.

You may find these numbers hard to believe but they are real. A credit card is designed to make you a "customer for life". You do have an option.

There are a number of companies in the marketplace that are Not-For-Profit Organizations, with certified credit counselors, who are available to help you get out of debt now. The best of these companies belong to the AICCCA, the Association of Independent Consumer Credit Counseling Agencies.

In addition, when selecting a credit counseling organization, it is crucial that you understand how your first payment to the credit counseling organization will be applied. Many companies in the market take your first payment as a fee to the company. Some of these companies will even call this fee a deposit and tell you that it will be returned to you when you complete the program. In either event, what this means is that you will accrue additional interest and penalties. If the credit counseling company keeps your first payment, they are acting in their interest, not yours.

A good credit counseling organization can help you reduce by your monthly interest rate and monthly payment. In most instances, they can help you get out of debt much faster that you could on your own and substantially reduce the interest charges you will pay. We, at American Debt Solutions , hope you find this article both informative and helpful and wish you the best in securing a debt free future.

If you would like to speak with one of our credit counselors today, please click here now or call us toll free at 1-800-246-4019.

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American Debt Solutions, Inc., a Non-Profit Credit Counseling Agency is a 501(c)(3) nonprofit organization providing consumers with free credit counseling and education as well as economical debt management services.