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About Debt Repayments

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    Considerations

    • When repaying debt there are a few things that you need to consider. One factor is the type of debt. Short and long term loans as well as mortgages offer a fixed rate of payment and a date that the agreement ends. Credit cards are slightly different. There is no fixed end date and the you can select the amount that you repay. Credit card companies will set a minimum payment option which is typically two to three percent of the existing, outstanding balance. Paying this regularly and on time will insure you do not accrue fines and charges.

    Effects

    • Typically, as you make your repayments, your outstanding balance reduces. Most loans and credit card companies offer the option of paying more to clear the balance faster; however, you should check ahead of time to make sure that there are no penalties for an early pay off. Timely and consistent payments help your credit score increase and help your chances of obtaining future and larger amounts of credit. Missing payments can bring fines and negative marks on your credit history.

    Misconceptions

    • One of the largest misconceptions surrounding debt repayment is the minimum payment trap. This is typical of credit cards. The minimum payment isn't designed to help you pay off your debt. It is designed to keep your debt for as long as possible. According to moneysavingexpert.com, a credit card debt of $3000 at a rate of 17.9 percent interest would take approximately 41 years to pay off if the cardholder simply paid the minimum each month. The cardholder would also pay over $6000 dollars in interest before the balance was paid off.

    Significance

    • A good debt repayment plan can help reduce your total amount of outstanding debt. In regards to credit cards, you should try to pay more than the monthly minimum. According to moneysavingexpert.com, the more you pay over and above the minimum, the more will go to the balance. A $3000 dollar credit card balance at 17.9% interest would generate a minimum monthly payment of between $60 and $90. Credit cards typically calculate the monthly minimum repayment to be between two and three percent of the outstanding balance. Assuming the cardholder does not use the card again, the balance will slowly start to drop. As the balance drops so does the minimum payment. If the cardholder continued to pay between $60 and $90 rather than the new monthly minimum then the debt would be cleared in 7 years. The total amount of interest paid would be just over $2000.

    Expert Insight

    • In regards to credit card repayment, there are always exceptions to the rule. You should try to pay more than the minimum except for times of financial difficulty. According to moneysavingexpert.com, if there is a change of circumstance such as reduction of income or job loss then certain debts must be prioritized. Items such as food, mortgage and utilities will need to be paid for before the credit cards. In instances such as this it is best to make only the minimum until things change. Your balance won't move much but you'll at least be avoiding further fines and charges.

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