Around half of credit card holders — 51% — carry a balance on their card each month, according to research from J.D. Power. That means these folks are paying a lot in interest on the purchases they make.
In fact, those who make only the minimum payment each month probably pay more in credit card interest than the original price they paid for each item.
The simple explanation for this reality is that the card issuer adds its interest charges to your principal, which is the amount you originally borrowed. So, your debt grows at a rapid pace.
How Compound Interest Works
If you’re paying 10% interest on a $100 credit card balance, you’ll be charged $10 the first month. With compound interest that $10 will be added to your original debt so that you now owe $110.
The following month’s credit card bill will include the $10 interest, so you now owe $121. And if the interest rate is higher than 10% — which is often the case with credit cards — you will pay even more.
Imagine how much you will owe if this continues over an extended period! Or, you can use this calculator to see the true cost of all your combined debt.
Paying Interest on Your Interest
If you don’t pay off your balances in full each month, you pay interest on your interest charges. After a few years, you could end up paying two, three, or even four times more than what you originally borrowed, thanks to compound interest.
People with multiple high-interest credit card balances often turn to debt relief programs to pay their way out of this pickle.
Debt Settlement for Financial Relief
You might have heard of “debt settlement” referred to by a different name, “debt relief.” The two concepts are one and the same.
Debt settlement is the only way to reduce your debt as opposed to merely transferring it to another loan or credit card. With debt settlement, your debt is negotiated down by a specialist, and you pay less than you owe.
The creditor forgives the remaining balance in a transaction known as a settlement. A good debt settlement company can reduce a client’s debt to a fraction of what they owe and shorten the payment terms.
Debt Consolidation
Debt consolidation also falls under the debt-relief umbrella. It refers to taking out a new loan to pay off multiple debts. Those debts then are combined into a single loan, usually with more favorable terms like a lower interest rate and a reduced monthly payment amount.
Another plus of debt consolidation is that you will no longer be required to juggle multiple payments. Debt consolidation is a popular option for people who are saddled with credit card debt.
So, how does debt consolidation work? There are many different ways to go about this.
One type of debt consolidation is to contract with a debt settlement company such as National Debt Relief. Once you do so, you’ll no longer be required to make those credit card payments. Instead, you will deposit one monthly payment into an FDIC-insured account in your name.
As your account grows and covers what you owe a creditor, the debt settlement company will begin to negotiate with the creditor. Once the two sides reach a settlement, the debt settlement company will ask your permission to make a lump sum payment to the creditor.
This process continues until you are debt-free, which typically takes as little as 24 to 48 months.
Bankruptcy Has Lasting Consequences
Some people think that with bankruptcy, you legally declare that you can’t make your payments and all your debt quickly disappears.
While bankruptcy can eliminate many of your debts, some types of debt — such as certain taxes and child support — are not eligible for discharge in bankruptcy.
Bankruptcy also has other consequences. For example, it can remain on your credit record for up to 10 years and cause your credit score to plunge. That makes it virtually impossible for you to get new credit at a reasonable interest rate, if you’re approved at all.
Your insurance premiums will likely go up. Bankruptcy might even prevent you from renting or buying a home.
Many employers now routinely check a prospective employee’s credit history, so bankruptcy could even keep you from getting a job.
If you’re drowning in credit card debt with high-interest charges, there is hope. And there is help.
