Ask Farnoosh: How Much of My Credit Card Balance Should I Pay Each Month?

Jon writes: How many times the minimum payment should you pay towards a credit card bill?
 
In a perfect world you would pay the entire balance each month and avoid any interest charges, but that, of course, is not so practical for card holders lacking sufficient income to properly address their debt. In 2012, about one-third of credit card borrowers occasionally only paid the bare minimum, which is actually an improvement from previous years, according to a survey by FINRA.
 
At the very least, do better than just the minimum payment. Otherwise, it’s like being on a “treadmill to nowhere,” Greg McBride, senior financial analyst at Bankrate.com, says. For example, on a $1,500 credit card balance with a 15% APR, the estimated minimum monthly payment is $35. If that’s all you pay each month, you’ll be in debt for 11 years and pay about $1,400 in interest on top of the balance.
 
Paying double or triple the minimum is one way to help knock down that balance faster — and sticking with that fixed monthly payment even as the balance shrinks. By paying, say, $70 a month, every month, you can pay off that debt in just two years and pay just $257 in interest.
 
Last, credit card companies are now supposed to disclose on your statements how long it will take you to pay off your balance if you simply make minimum payments, as well as in just three years. Use it as a guide to getting out of debt quicker. There are also a number of online calculators that can help you estimate how long it will take you to pay off your balance.
 
Liz asks: Do you have a simple budget making process? Please help! I don't know how to make a budget. Should I use special software?
 
For budgeting newbies, I honestly don’t think you need to download special software and tools just yet (but I’ll give you a list of my favorites in a moment). I recommend you first establish some concrete near-term goals — say, eliminating credit-card debt or saving for a down payment on a home — and identifying a timeline and plan to accomplish those goals. For example, one goal may be to erase $5,000 in debt in the next 12 months. In the words of fellow personal finance coach Jason Price, “Budgeting isn’t about being on a financial diet. It’s freeing in that you can decide the most important ways to use your money towards savings, giving or your lifestyle goals.”
 
From here, it’s time to get a handle on spending. Review your inflow versus outflow, your income versus expenses. If expenses are consistently greater than income, then it’s time to find costs you can cut and spending leaks you can plug. Go back at least three months to identify spending patterns and recurring costs. “You’ll need to take two to three hours to sit down, grab all your bills, log into your online banking and pinpoint everything that comes in and goes out of your account,” says Dan Plant, head of editorial at MoneySavingExpert.com.
 
From here you can create a budget, keeping in mind some key spending caps, like no more than 30% of net income should go toward housing costs, 15% for auto payments and 5% to 10% for food. Special software can certainly give you a more robust plan and help you visualize your progress. And there are a growing number of online services and applications that can do this for free. In addition to the popular Mint.com, I like Learnvest, Mvelopes, and Budgetpulse.
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.
 
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