Few of us are without at least one credit card these days, they’re easy to get, they’re convenient – particularly if you’re travelling and need fast access to money, they make us feel wealthier and they give us instant gratification when we want something. We say “feel wealthier” because rather than actually being wealthier, credit cards frequently allow us access to goods and services that we could save for, but choose not to. This isn’t always a bad thing – sometimes you need the item then and there, like a new refrigerator, but without a plan to pay back the debt effectively, and cheaply, the debt can soon start to weigh you down, limiting your ability to save as more of your income goes to servicing the debt.

Many people become used to only paying off the minimum monthly amount, despite promising yourself you’ll pay it all off next month. But next month something always comes up – a birthday, a big night out, a weekend away, a shopping splurge. It’s easy to procrastinate, but it’s also very costly.

A small monthly payment may seem insignificant, but over time individual payments aren’t insignificant when you understand the true cost of credit cards and interest.

For example lets say you go out and purchase a new LCD television for $2,500 with your credit card which has an annual interest rate of 18%. The minimum amount to be paid each month would most likely be around $50.

Minimum payments on credit cards are typically calculated as a percentage of the entire balance owing. The percentage amount is generally around 2 percent but may vary depending on the type of credit card. Minimum payments pay off both the principle and the interest charged. Before you breathe a sigh of relief at hearing that, ask yourself how much of the original amount is really being paid off if you multiply $50 x 12 months, and the compounding interest rate on $2,500 is 18%.

Assuming that the only thing owing on your credit card is the $2,500 purchased, 2 percent of this debt would be $50. At an 18 percent interest rate, the $50 payment would cover $37.50 in interest and $13.50 towards the $2500 debt. After the first payment, you would still owe $2486.50.

The minimum monthly payment formula

1. Divide 18% by 360 days of the year: .05%.
2. Multiply .05% by 30 calendar days: 1.5.
3. Multiply 1.5 by $2500 which equals an interest payment of $37.50.
4. Subtract $37.50 from the $50 payment and you see you’ve paid just $13.50 of the $2,500 owing.

The real cost

If you only pay 2% of your total balance due every month, it would take 334 months (28 years) to pay off the $2500 credit card debt, and the original $2500 purchase would have cost $8397 to pay off – more than three times the original purchase amount.

The reality

Credit cards aren’t inherently evil products, they facilitate transactions, help you purchase what you want and need, and if you ever find yourself stuck in a village in foreign country without cash, chances are there will be someone who will take Visa or Mastercard – not to mention that a piece of plastic is much safer than carrying around large bundles of notes.

When you have credit card debt, procrastination and not having a plan are your enemies. It can be hard to sit down and face the realities that you face, but equally the longer you wait, the more you will pay.

The ability to discipline oneself is the real key here. There’s are no ‘tricks’ or ‘secrets’ to paying off credit card debt other than to consider switching to a lower rate card, or calling your bank for a better deal and aggressivly paying down the debt. And there are savings to be made everywhere. Instead of buying new shoes, or a new top, or even something as small as eating out when you have food at home, exercise discipline and put that money to paying off the credit card debt.

Using the formula above, lets say you’ve now paid off $1000 of the credit card debt and only owe $1500. If you then reverted to only paying off the $50 each month, of that payment amount $22.50 would now go to interest and $27.50 would go to the original debt. It would still take years to pay off at this rate – and this example assumes that the interest rate doesn’t increase at any time.

In short, if you get a bonus from work, if you get a pay rise, if you inherit money, pay off your debt as soon as possible, because once its gone, its gone for good and you’ll be free to spend your money any way you like.