Don’t Pay Only the Monthly Minimum on Your Credit Card

Don’t Pay Only the Monthly Minimum on Your Credit Card-Part One

You may think that when you pay on time the minimum amount due on your credit card at the end of each month, you’re being financially responsible.  Think again. 

True, paying the minimum on time will keep you from being hit with late fees or suffering a blow to your credit rating.  But that’s not the whole story. 

The long repayment period

Consider the following: If your credit card’s outstanding balance is $926.53 and the interest rate is 19.9% -- a widespread rate these days – then paying only the minimum required each month means it will be eight years and two months before you’ve paid off the full amount.

If your credit card’s outstanding balance is $4,797.36 and the interest rate is still 19.9%, then paying only the minimum required each month will mean it will be 42 years and one month before you’ve paid off the full amount.

It’s not just that you’ll be repaying what you borrowed on the credit for as far as you can see into the future: it’s that you’ll be paying a huge and unnecessary amount of interest in addition to repaying the original sum.

In part 2 of this series we’ll cover unnecessary interest expense and how your minimum payment is applied.

Till then for more valuable financial advice, please visit us at prudentfinancialservices.net

Say no to Minimum Payments on Credit Cards

For years, the low monthly minimum payments required on credit card balances allowed consumers to spend far more than they could really afford—causing many to have serious financial difficulties and a bad credit score!

Lately, however, some credit-card issuers have started to raise the level of the minimum monthly payment.

Let’s be clear: an increase in the monthly minimum is actually good for consumers, as they will be paying off their credit card debt sooner. But that can still cause some real hardship in the short-run.

Holders of MBNA MasterCard, for example, have seen their monthly minimums rise as much as seven-fold, causing a severe financial squeeze.

Many of those cardholders relied on MBNA’s introductory low-interest rate of 1.99%, only to see that rate escalate dramatically – to as high as 16.99% -- if they miss a monthly payment.

New rules

Federal rules introduced in September 2010 force credit-card companies to tell cardholders how long, in years and months, it will take them to pay off their outstanding balances if they pay only the minimum each month.

The Financial Consumer Agency of Canada has a credit-card payment calculator on its Website (www.fcac.gc.ca) that shows how much of a difference it makes to pay more than the monthly minimum.

For example, paying only 2% of your balance every 30 days barely covers the interest, and leaves almost nothing to whittle down the principal. On a balance of $2,000 or more, it would take you about 30 years to pay off the existing debt even if you never charged another item to the card.

If the monthly minimums rise to 4% of your balance, you will cover the interest but it will still take 10 to 12 years to pay off the balance even if you do not add any new charges.

Try a personal bad-credit loan

It would be better to take out a personal loan or even a bad-credit personal loan, for example, at Prudent Financial Services. That way, you will pay all the debt within one to four years, depending on the amount you borrow. Most loans of $1,000 or less at Prudent are paid off within the year if payments are made on time.

Other options

● Start paying cash for purchases and stop buying items that you can only finance on your credit card.

● Do some ruthless budgeting: identify areas to cut costs.

For further information please contact Prudent Financial Services http://www.prudentfinancial.net