Monday, February 18, 2013

Beware of the Credit Card Minimum Payment Pit

If you had been content on making the minimum payment on your credit cards, then this is a wake up call for you. Contrary to what you may believe, paying only the minimum amount stated on your credit card bill cost you more than what you believe. That amount is only 4% of the principle amount that you owe. That the the only percentage that you are paying for and the rest are finance charges and the high interest rate what cards are notoriously for.

This article will prove to you why paying more than the minimum can save you more in the long run. Financial experts will always tell consumers that sticking to the minimum payment is the most common pitfall that can trap you. It gives you a false sense of complacency - thinking that you are solving your debt problem when in truth, you are not. Most of us want to minimize our debt payments so we can allot more of our income for our daily expenses. That can be satisfied by the minimum payment and will keep your credit score from suffering. However, this method will maximize the extra payments that you will make outside of the actual debt that you owe.

It all makes more sense if we do a bit of number crunching. Let’s us assume that you have $5,000 worth of credit card debt with an APR (annual percentage rate) of 20%. Your minimum payment is $200. If you stick to this amount, it will take more than 11 years (11 years and 11 months to be exact) to finish paying your credit card balance. Not only that, you will be paying more than $3,400 worth of interest. That amount could have been spent on something more enjoyable right? And this is with the assumption that you will no longer use your credit card.

But if you add $50 to the minimum to make your monthly payment $250, you can pay off your debts in 25 months - that is 2 years and 1 month. That is a significant reduction on the 11 years that you need to spend finishing your debts if you have stuck with the minimum amount. Not only that, you will only end up paying for $1,133 worth of interest.

The more you increase the amount you pay every month, the less time you will spend paying for your credit card debts. If you make your monthly payments bigger, like $300, you only spend 20 months to completely pay off your debts. The interest amount also becomes a little over $900 only.

Imagine all the savings that you will get by skipping on your morning Starbucks latte or opting to take a brown bag for lunch everyday. It doesn’t have to take years to finish your debts. You can make the decision to finish your debts sooner by paying more than the credit card’s minimum payment requirement.

The decision is yours to make.

If you find it hard to meet the minimum payment, then opt for other debt relief options. Programs like
debt negotiation may be a better alternative than sticking to the minimum.

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