Understanding credit card minimum payments can save you from a mess
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It's important that you understand what you're getting into when you make only minimum payments on your credit cards. Minimum payment levels are set strategically to maximize creditor profit off of your interest payments and keep you in debt as long as possible. Depending on your interest rate and balance, paying just the minimum can result in reducing your debt minimally (or not at all) each month. Here are five things you need to know about credit card minimum payments.
#1 Paying just the minimum can result in no end to your debt
Depending on your interest rate, the minimum payment may not reduce your balance at all. If your minimum payments are set at 3% and you have a 15% interest rate with a $5,000 balance, your monthly minimum payments will have you debt free in 14 ½ long, long years. You will end up paying off $8,365 and you will pay nearly 70% of your original balance in interest.
#2 Adding $10 to your minimum payment can make a drastic difference
Suppose you have a $2,000 card balance with an interest rate of 18% and a 1% minimum payment, you will be paying your debt for more than 15 years and you'll pay $2,423 in interest – that's 121% of your original balance! But by adding just $10 to your monthly payments, on top of your minimum, you will cut your repayment by a decade down to around four years and will cut your interest by two-thirds.
#3 Pay the minimum wisely if that's all you can afford
If you simply can't afford to pay more than the minimum due on your credit card, there's a way to do this in a smarter way. Instead of paying once a month, split your payment in half and pay it with your biweekly paychecks. Paying twice per month can save you hundreds of dollars in interest and save you a year or more in repayment time without increasing your monthly payments.
#4 Don't reduce your minimum payments as your balance drops
Your minimum payment will start out higher then decrease as your balance drops. This is part of the credit card company's strategic design to draw out your debt. To fight back and pay less in the long run, don't decrease your minimum payment. For instance, if your initial minimum payment was $50, try and stick to that for as long as possible to slash interest and payoff time.
#5 Try and pay the interest plus some principal rather than just the minimum
At a very minimum, the minimum you pay each month should cover the interest on your account as well as some towards principal. If your interest exceeds the amount of your minimum payment, you should really try to pay that plus $1 so you're constantly moving your principal balance downward. Even if you have to work some overtime or a part time job to do this, it's best for your finances.
Tips to stay out of credit card trouble
In addition to paying more than the minimum if you possibly can, here are some tips to keep you out of trouble.
- Don't keep your credit cards on you. If you don't have it in your hand, you can't swipe it.
- Never buy necessities on credit if you can't afford to pay the balance at month's end.
- Never go over 30% of your available credit if you can help it – or your FICO score will suffer.
- Once your cards are close to the limit, pay them down and stop using your plastic.
- Never take out a cash advance on your card – the interest rate is higher than normal.
- Don't make payments late – after two late payments, your rate can be hiked up.
If you're in over your head with credit card debt, are living paycheck to paycheck, and are behind on other bills, Chapter 7 or Chapter 13 bankruptcy can help. Contact the Law Offices of John T. Orcutt today for a free consultation. Call +1-919-646-2654 for bankruptcy help in Greensboro, Raleigh, Garner, Wilson, Durham or Fayetteville.