It is reported that more than 1.8 million individuals filed bankruptcy in 2012. Additionally, the average credit card debt in the U.S. stands at an average of $4,878 per adult. This is just a part of the total national consumer debt of more than $11 trillion, with more than $1 trillion of that debt delinquent as of the end of 2012.
Needless to say, these statistics leave many Americans with a strong desire to get out of debt. In fact, the total consumer debt has dipped a bit over the past two years, although bankruptcy is not a preferred way to eliminate your debt. To begin the process of getting out of debt, it is helpful to understand how your debt actually works.
Of course, we know we build up our outstanding credit card balance by spending. However, few people realize the role interest plays in keeping that debt high.
One amazing insight is that if you use your credit card to buy diapers for your newborn and make only minimum monthly payments, you can actually be still paying on those diapers when you child enters high school.
Reducing the Balance
Your lenders charge you interest each month on your outstanding balance. In many cases, your monthly payment pays mainly interest, with little to nothing going to reduce the balance. The key to getting out of debt is reducing that balance. There is a snowball effect that as you reduce your balance, each subsequent month’s interest payment is lower and more goes to further reduce that balance.
There are two easy ways to get out of the monthly minimum payment trap and get out of debt. First, pay a little more than the minimum each month. That extra reduces the balance for that month, and every other month you will save on interest. The second step is to pay half your monthly payment every two weeks. This one step can save hundreds or thousands of dollars in interest.
Of course, lowering spending helps but these two simple steps will go a long way to lowering your debt burden.