When your monthly statement comes, there’s a great temptation to pay only the minimum. Don’t do it. Read your statement carefully for information about how long it would take to pay off your account balance if you only pay the minimum payment. It can take years, even decades, to pay it off. If possible always pay the balance in full every month or pay more than the minimum amount. Doing so will help you to establish an excellent credit rating, a score used by lenders to determine the rate you will pay on your loan.
Just look at what paying only the minimum payment really means:
Example: A credit card with a balance of $1,000 that has an APR of 18%.
|Annual Percentage Rate||18% APR|
|Years to Pay Off||13|
|Total Paid to Credit Card||$2115.41|
|Total Paid in Interest||$1115.41|
When you break the Annual Percentage Rate (APR) down to twelve monthly periods you end up with a 1.5% finance charge per month. For this example we will also use the assumption that the card calculates the minimum payment by 2.5% of the balance.
This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the card’s APR of 18% or 1.5% per month that means of that $25 payment only $10 is being applied to the balance while the other $15 is paying that month’s finance charge. During the next month your remaining balance is now $990 so your next minimum payment would be calculated as $24.75 ($990 x 2.5%). For this payment $14.85 covers that month’s finance charge while $9.90 is applied to the balance.
As you can see above, you have made almost $50 in payments yet only reduced your balance by $19.90. If you were to continue paying only the minimum and the features of this card remained unchanged it would take 153 months or almost 13 years to pay off a $1,000 initial balance. This would result in paying $1,115.41 on just interest alone, more than the amount of the original balance.
Follow these guidelines to avoid credit card debt and create good credit at the same time.
Here are some other credit card problems to avoid:
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