CloseMeeting the minimum monthly payments of your credit cards is like running on a financial treadmill. Sure — we’re all guilty of it; whipping out the ole’ credit card whenever cash is tight. In the long run, however, all those card swipes do count: if a cardholder made a minimum payment of $200 each month for a $5,000 credit card balance with an 18.9% interest rate, it would take 11 years and 5 months to finally pay off! When factoring in interest, the total credit card results come with a $8,109 price tag. Take a look at this infographic:
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Consumers pay 62% more when they just meet the minimum payments of their credit cards. It can take significantly longer to pay for something than it would have had you simply saved up the money first.
Check your credit card agreement for how your minimum payment is calculated. The typical minimum payment is usually around 1% – 3% of the total balance owed. The interest is then factored in next month when calculating your minimum monthly payment, potentially even increasing your overall debt even as you’re making payments.
**Protip* Credit cards charge more in interest than you can typically earn in a retirement investment account, so get out of debt before you invest. Paying off the full balance sooner saves money in interest.
Once you’re out of debt, the money you would be spending on monthly minimums or might be paying service charges with can earn interest for you when you invest wisely. Any non-essential spending you can put on-hold in order to pay down debt s one of the best investments a person can make.
Items and Interest
Let’s look at how much you’ll really pay for what you want when you make minimum credit card payments on these popular items! The results may surprise you at an 18% interest rate, meeting minimum payments between of $15 or 2% of the balance.
iPad 2 by Apple
price: $399.99
minimum payment: $15
*It will take you 35 months to be rid of your debt. In that time, you will pay $114.66 in interest.
Canon EOS Rebel T3i
price: $425.00
minimum payment: $15
*It will take you 38 months to be rid of your debt. In that time, you will pay $132.57 in interest.
13‑inch MacBook Pro by Apple
price: $1,499.00
minimum payment: $37.48
*It will take you 153 months (12.75 years!) to be rid of your debt. In that time, you will pay $1,671.69 in interest.
All-Weather Outdoor 32 In. 720p LCD HDTV – Black by Sunbrite
price: $2,295.00
minimum payment: $45.90
*It will take you 317 months (over 26 years!) to be rid of your debt. In that time, you will pay $5,281.86 in interest.
The Credit Card Act of 2009
Credit card companies are now required by law to show you on your bill how long it will take to pay off your balance, making minimum payments how much interest you’ll end up paying.
*Protip: If you have more than one credit card, make minimum payments on all cards except for the card with the highest interest rate and pay that one off as fast as you can to maximise your savings.
If Credit Cards Worked Like Mortgages
If you paid a set amount regardless of your balance (ie. you pay $200 per month until the balance was paid), it would take you 32 months, rather than the 137 months it would take if the payment depended on a minimum balance. You would pay nearly 50% less in total interest.
Paying the minimum will keep your credit report in order, but that is exactly how the system is designed to generate profit for the credit card companies. They continue to profit while you continue to accrue interest.
If you’re in debt, one of the best ways to improve your credit score is to tackle how much debt you have and lower your ratio of debt to available credit. This will usually raise your credit score.
In need debt relief? Contact us and discover your financial debt settlement options!
sources:
http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx
http://credit.about.com/od/usingcreditcards/tp/pay-more-than-minimum.htm
http://www.investopedia.com/financial-edge/0712/why-making-minimum-payments-gets-you-nowhere.aspx
blog.equifax.com/credit/making-minimum-payments-on-credit-cards-will-cost-you-in-the-long-run
http://credit.about.com/od/usingcreditcards/qt/minimumonly.htm
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