What is interest?

Interest is the amount that is paid back in addition to the amount you borrowed when you take out a loan. Basically, interest is a fee for borrowing money. It’s how lenders make a profit from giving out loans.

How is interest calculated?

Interest is calculated based on your amount of debt and then divided by 12 months. For instance, if you have a credit card with an interest rate of 24% and a balance of $1000, you would multiply 1000 by 0.24 and then divide that number by 12, which gives you the amount of interest you’ll pay that month. In this case, $20. A lot of the time creditors will set your monthly payment to barely cover the interest, so in this case, you may have a $30-$35 payment, effectively keeping you in debt longer by not allowing you to quickly pay down the principle.

Interest on Loans and Credit Cards

When taking out a loan, always remember that it is money that is being borrowed and you’re paying interest to use it under the promise that you pay it back as soon as you can. For credit cards, any purchases made on your card before paying off previous amounts, are added to your balance and you’ll pay interest on the entire amount. This will change your minimum payment amount as well if the minimum payment is based on a percentage of your balance. By keeping low balances on Credit Cards (ideally beneath 30% of your credit limit) you can avoid getting hit by high-interest charges.

Paying Back Loans and Credit Cards

What you can do on your own to pay back your credit cards and loans efficiently and effectively are a few things:

1. Pay over the minimum payment

If you have a savings account with at least 3 months of your total outgoing monthly expenses saved up, you should be making above minimum payments as often as possible until your debt is paid off. This seems self-explanatory, but a lot of people are against making above minimum payments because they don’t want to pay more than they feel like they have to. Well, those people are only hurting themselves and putting more money into the pockets of their creditors. If you have the ability to make additional payments above your minimum it is ALWAYS applied directly to the principle. It is 100% in your best interest financially to make above your minimum payment if your funds allow it.

2. Stop charging on your accounts frequently

The only way to get out of debt is to stop accruing it. You should only be charging on your accounts when something requires a credit card or to use it once a month to show activity on your account, only if you’re beneath 30% of your credit limit though. If you’re the type of person who feels like they have to charge on their accounts and you find it difficult to control that urge then there is something you can do, freeze your cards, literally. Take your credit cards and stick them in a Tupperware container or a plastic bag and freeze it. You cant charge on it if it’s frozen and if there is an emergency you can always defrost it underwater, but you probably won’t feel good doing that unless you absolutely had to.

3. Pay your balance off in full

Again, this only applies if you have 3 months of your total outgoing monthly expenses saved up in a savings account. Pay your debt in full, this is the best way to avoid any interest charges. As long as you pay your balance in full there should be no interest charged. This is especially true for small balances that can easily be paid in full.

What if I can’t do those things?

Don’t panic, your situation is very common. You are not alone, not by a long shot. There are companies who specialize in assisting people just like you. Consumer Credit Counseling agencies are one type that can help you reduce interest rates on unsecured debt and pay your debt back quickly and efficiently. Debt settlement exists if you cannot afford to do credit counseling and have no other options other than bankruptcy, which is rarely the answer.

For many people, personal debt, especially when they get in over their heads is overwhelming and often times suffer in silence. Lynn, one of our clients, was gracious enough to participate in an interview to give some insight into her journey. Hopefully, from Lynn’s story, you can find some tips to help you get your debt under control.

Q: What triggered you to address your unpaid debt and credit status?

A: I started to receive letters in the mail from Collection Agencies and credit card companies like Capital One stating that I owed money and I would be sued and garnished if I did not make efforts to pay the debt

Q: What kind of debt did you have? What was your credit score?

A: When I first started, my Credit Score was a 540. I was piling on credit card debt, medical bills and old collection accounts I had been ignoring.

Q: What made you seek help from a credit counseling service?

A: The fear of being garnished. I already did not think it was in my budget for me to pay back any of my debts and the thought of losing more money was enough.

Q: What Actions did you take personally to prepare you for entering into a Consolidation with your debts? How did you find an agency to help you, and why did you feel that was a safer route?

A: A few friends of mine who were already enrolled in Debt Management Programs referred me to a Credit Counseling agency. After doing my own research online I was able to talk to an agent. We did a thorough budget analysis that showed me how I could afford to enroll in the program and pay back my debts. I looked through my credit report to find all of the debts I had. Once it was clear that I could afford to fit this into my budget I felt this was a safe route.

Q: Explain your experience in the Debt Management Plan. What did you learn while you were going through the program? How did your behavior change financially while you were enrolled in the Debt Management Plan? Were there any extra habits you broke to help build your credit while you were paying off your older Debts?

A: The budget analysis was very important in the beginning because it showed me where I was spending extra money when I did not need to. When I started out, money was always tight. The time I spent in the Debt Management Plan was the first time I ever had to stick to a budget. In order to save a lot more, going out to eat was immediately cut out. Initially, only the creditors who were threatening to come after me were added to debt consolidation. I got a secured credit card with a $500 savings deposit. This would help me build new credit while I paid off my old debts. After time had passed and the balances became lower, my other accounts were added in until I had everything completely paid off.

Q: Now that you have gone through with a Debt Management Plan and successfully completed the program, what type of changes to your financial life do you see? What is your Credit Score like now and what actions are you currently taking to be able to maintain your positive score increase?

A: When I began working on my credit score it was a 540. Today, I am looking at a score of 730! By sticking to on-time payments and a budget, I was able to keep my $500 Secured Card at a low balance and after a year or so I received a pre-approved offer for a Discover Card at 18%.

Q: Would you recommend a Debt Management Plan to your friends and colleagues? What did you take away from the program that you did not expect initially when you enrolled in the program?

A: I currently do have friends who are enrolled in a Debt Management Plan. My advice to them was to first make your budget so that you can see where your money goes. When I began Debt management I did not expect the impact on budgeting nor did I understand how your credit actually works. Now that my score has increased to a 730 I’m planning on buying myself a new car!