Today, an update to the $0 Balance Challenge:
Last October, a reader wrote in that her goal was to eliminate $8,157.48 in total debt she had on two credit cards over in twelve months. Not an easy goal given the payment arrangement she worked out for both cards has her sending in only $200 a month; at that rate, she'd have paid $2,400 in 12 months with some percentage of that being eaten up in interest payments.
Three months in, though, there has been progress: I've managed to pay off a little more than $1200 and I'm quite excited. Still, I have a long way to go and staying focused on paying down the cards is quite challenging. For the past few months I've stuck with the minimum payments but when I get "extra" money, usually from baby-sitting or freelancing, I always some put money towards the cards. I've put the most money towards the card with the highest interest rate.
Plan for 2010: Increase my minimum payments from 80 per month to 120 per month on card #1. Commit to contributing a set percentage of "extra" money to paying down the debt on top of regular payments. I'm not sure how much of my "extra" income should go to paying down debt though, guess that's something to think about.
First, CONGRATULATIONS! By finding a way to pay more than the monthly minimum, you've eliminated in three months what it would have taken you six months to pay. That's wonderful and it shows how one of the most important principles of paying off debt works: pay more than the minimum.
Paying more than the minimum on your credit cards not only means you'll get the debt paid off faster, but it saves you money by eliminating interest payments from the end of the loan. Remember: any interest you pay is compounded and tacked on to every monthly statement. That means the longer you take to pay off your credit cards, the more you're going to pay in interest.
As far as how much extra you should pay each month, pay what you can afford. Freelance income isn't necessarily steady, so don't budget for the same amount every time. That said, pay as much of that money to the card as you can afford to, but make sure you save at least 15 percent of it in a separate account so you don't wind up like I did: a $0 Balance on my credit card but a big tax bill.