Quicksand: Debt's impact on budgeting

Do you ever find yourself quietly pondering where it is exactly your money goes? Or, do you find yourself constantly struggling to save money and get ahead in spite of perfecting your budget and cutting back on spending? If you're struggling with money and credit cards are a part of your spending strategy, it's time to look at how your debt-load could be crippling your efforts to budget and save.

Think of these simple costs to use a credit card:

Balance Interest Cost

$2000 10% $200/year

$5000 10% $500/year

$10,000 10% $1,000/year

$20,000 10% $2,000/year

Typical interest rates range from 8% too 14.9%, with penalty increases that can send your APR into the 23-26% range. Let's double the interest rate to look at how a higher interest rate affects your debt-load:

Balance Interest Cost

$2000 20% $400/year

$5000 20% $1000/year

$10,000 20% $2,000/year

$20,000 20% $4,000/year

Being in debt can cost thousands of dollars a year. Factor in Multiple credit cards and you can see how the cost of being in debt can keep you in debt. It's a maddening cycle and one many don't understand until too late.

With the cost of being in debt so high, it's important to understand how credit cards work. Many people do not comprehend the impact of interest until they're swimming in it. The amount of interest you pay every month is based on your balance. The higher the balance, the more you pay in interest. Interest is added to your balance, which drives up the number that determines your interest payment for the next month. Add on penalty fees, and you can see how interest and penalties perpetuate your debt-load.

Let's talk minimum payments for a moment. If you're carrying a significant balance and paying a higher interest rate, you've probably seen your minimum payments double or triple from where they once were. Making the minimum prolongs the life and size of your debt-load because this small payment does little to decrease your balance and subsequently, the size of your interest payments every month.

Minimum payments alone can cost you hundreds, thousands of dollars a month. It's the unpredictable and expensive minimum payments that can quickly deplete your extra money, crippling your efforts at budgeting and saving. Additionally, when minimum payments are on the high end, it becomes difficult to pay more than the bare minimum, which increases the difficulty to aggressively reduce your balance and further prolonging the life and size of your debt-load.

When it comes to your money, don't overlook how your credit cards could be hindering your efforts to budget and save. The credit trap can be like stepping in quicksand: Easy to sink, hard to get a grasp and difficult to get out. This year, look at decreasing your credit card balances when you're perfecting the budget and maybe your next budget will allow you to save and get ahead once and for all!

TIP: Check your credit report for incorrect information, such as name, address, phone numbers, and even open / closed accounts. You should report accounts that show as open but are really closed to the credit bureau.

Reprinted from Zongoo! Finances