Why Minimum Monthly Payments Will Cost You Big |
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by: Janna Weiss
Sometimes credit cards make life a little too easy. How is that possible? By allowing us to make purchases we really can’t afford, and then giving us an unlimited amount of time to pay off the debt. It sounds great in theory, but ask a card holder who’s been paying off the same debt for years. They’ll tell you that extending your repayment isn’t as easy as it sounds.
That is because of the amount of interest you accrue when you stretch out your debt over a long period of time. In fact, credit card companies count on card holders with revolving debt (debt that rolls over from one month to the next). Those consumers pay the fees and interest rates that keep the card companies so profitable.
As a card holder, minimum monthly payments are your enemy. Consider this: a fairly typical household with $6,600 of credit card debt, making minimum monthly payments, would take over twenty five years to pay off their balance – and that’s with a decent interest rate! It’s nearly impossible to make a dent in your debt by making minimum payments.
Some card holders lament the fact that their debt actually increases each month when they make minimum monthly payments. I’ve seen this firsthand; fees for carrying a balance, combined with interest, can really overcome a minimum payment. My experience made a believer out of me, and since then I have always paid two or three times the minimum monthly payment in order to stay ahead of the debt.
Senator Dianne Feinstein of California is the proponent of a new bill that would require credit card companies to educate their consumers about the consequences of minimum monthly payments. This would be a huge boon to card holders, as it would illustrate just how long it takes to pay off a balance with minimum payments. Most card holders carry a balance from month to month, and 11% of them make only the minimum required payment. Many simply don’t realize what a poor choice this is.
The best way to handle credit card debt is to prevent it. Pay off your balance in full each month. But if an emergency or special event has left you with a heap of credit card debt, there are steps you can take to reduce it quickly. Remember: the longer you take to pay off an interest-bearing balance, the more you will ultimately pay.
To get serious about paying off your credit card balance, pay double or triple the required amount each month. If you get a work bonus or a tax return, use some of it to pay down your balances. Transfer high-interest balances to 0% interest credit cards to make your monthly payments mean something. Just be sure to pay off the balance in full before that 0% interest period ends.
Minimum monthly payments might seem cheap at first, but they come with a hefty price tag. Get your debt paid off as quickly as possible to avoid throwing money away on fees, penalties, and interest.
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