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Credit Debt A Problem For Young People

A credit card sitting on a rusty old bear trap.Younger people today have way more credit card debt than their parents and grandparents did at the same stage of life. And they are paying it off a lot more slowlyl than previous generations did.

Indeed, today’s generation of cardholders is destined to be saddled with debt until the day they die if they don’t start doing something about it now, according to a new study in the January 2013 Economic Inquiry magazine, an academic journal.

The authors — Sarah Jiang, manager of credit and business strategy at Capital One, and Lucia Dunn, an economics professor at Ohio State University — say that consumers born in the early 1980s average $5,689 more in debt than people born in the early 1950s did at the same age and $8,156 more than people born in the early 1920s, the study said.

A big reason, of course, is easier access to credit.

Credit cards didn’t go mainstream until the 1960s and 1970s. Now, just about everybody has at least one, if not several.

Add to that more than $1 trillion of student loans — which now total more than credit card balances outstanding — plus auto loans and other types of credit, and it’s not hard to see how the average consumer debt has ballooned in the past 20 years.

Moreover, consumers born between 1980 and 1984 pay off their debt 24% slower than those born in the 1950s and 77% slower than those born in the ’20s, the study found.

“If these habits persist, there may be more people who have difficulty paying off their credit card debt during their lifetime, as well as more financial problems for the elderly,” the researchers said.

The solution sounds easy enough: Pay a little bit more each month, and you’ll pay down your debt a lot faster.

In fact, the authors show how the credit card industry can help the situation by mandating increased payments.

Short of that, you can pay down debt faster on your own with relatively little pain.

Here’s how. Ignore your minimum required monthly payment and pay a little bit more every month.

You’d be surprised how much quicker you can pay off your debt by making just slightly higher credit card payments.

The industry average minimum payment rate is about 2%. If you make only the 2% minimum payment each month on a $1,000 card balance at an interest rate of 19%, it will take you 100 months, or more than eight years, to repay the balance in full.

But what happens if you increase your payment by just $20 a month, to 4% of the balance?

That doesn’t sound like a whole lot, and you’ll barely feel it. But it translates into big savings and lots of years.

In fact, by paying $40 a month instead of $20, you’ll pay off your debt in one-third the time: just 33 months, or less than three years.

Why does this happen?

The magic of compound interest works both ways: As your balance declines, you’ll be incurring much lower interest charges over time.

To see how fast you can pay off your card balance under different scenarios, use this credit card payoff calculator.

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