Avoid only making minimum payments on your credit card

We all value the importance of good credit.  However, sometimes we overestimate our spending power.  

The credit card is all too convenient sometimes and at the end of the month you realize you've come up a bit short.

• You'll be paying an inordinate amount of interest. Credit cards can charge upwards of 15% interest. Considering you can borrow for as low as prime plus a half, which at this time is around 3.5% that's a considerable difference.

• Not being able to pay off your credit cards means you're likely also carrying a high debt to income ratio.  This is also frowned upon when evaluating your credit score.  Yes, you're meeting your minimum financial responsibilities, but lending institutions look at your payment patterns to determine if you are a risk to them. Financial institutions look at payment history when lending large sums of money for things such as mortgages or car loans if you simply have too much debt and can't possibly make the payments you may be declined.

In order to keep your credit in good stead, you’ll want to pay the minimum payment.  That's responsible spending it will prevent you from getting into trouble with your credit rating.  

Keep in mind if you only make the minimum payment each month, you'll suffer two ways.

Learn to budget effectively

Buying the latest electronic gadget such as a smart phone can be awfully enticing. However, it's sometimes prudent to step back from the situation and ask yourself, is this something I absolutely have to have or can I put it off for a few months while I take care of the balance on my current credit card(s).  

It's a great feeling to transfer the money over to your Visa and see that balance at zero. It means you're free and clear and ready to make purchases based on need, not desire.  An interesting exercise is to take an amount, say 1000.00 and calculate how much interest you pay based on 15% per month, over the course of a year. Total it up, and imagine what you could have purchased with that money.

Careful of the Minimum Payment Trap

Making minimum payments essentially translates into very expensive debt relief. It should not be depended on as a realistic part of your financial strategy. At some point, the card company may even hike interest rates or change their terms and you’ll have no choice but to abide by them. You may want to consider consolidating your debt into your mortgage or getting a consolidated loan at a much lower rate. You’ll either want to cut up your credit cards or practice serious control in their usage.

There are resources we have that will help you organize your finances.  For instance, we have a budget worksheet that is free and at your fingertips.  

Find it, and other tips at www.prudentfinancial.net/resources/resources.php