Each credit card statement you receive includes a "minimum payment" amount along with transaction, balance and interest rate information. Depending on other parts of your financial situation and your spending habits, the temptation to pay only the minimum can be great. As tempting as it may be, you should always try to pay more.
Credit card companies usually calculate the monthly minimum payment due as a percentage of your outstanding balance. The percentage is usually more than the interest rate they are charging on your balance, but low enough to make the minimum payment amount seem attractive. After all, they make money by charging interest on what you owe.
The cost of paying only the minimumAs you consider how much to pay each month, be sure you understand how all the numbers work. To keep it relatively simple, let us assume you have an outstanding balance of $5,000, the annual interest rate being charged is 12% (1% per month) and the minimum payment is 2% of your outstanding balance. If you just pay the minimum of 2% ($100) and have no additional charges, $50 of the payment goes to pay the interest and your balance is paid down to $4,950. If you continued on that schedule, it would take you 299 months (almost 25 years) to pay off the balance. On the other hand, if you paid $250 each month, you would have the balance paid off in about 23 months.
As a practical matter, unless you stop using a card each month you will have additional charges, interest will be charged and you can decide how much over the minimum you wish to pay. Here are some charts that show how this could work.
Example 1. Assume you start with a balance of $5000, have an additional $500 or $400 of charges each month and have a credit card with a 12% interest rate.
Example 2. Assume you start with a balance of $5000, have an additional $500 or $400 of charges each month and have a credit card with a 16% interest rate.
Paying more than the monthly minimum will eliminate the balance much faster, save you considerable interest charges and provide some peace of mind knowing you are taking a prudent action.
Pay more than the minimumHere are five ideas for finding cash to make the payments and reducing your credit card balance faster:
Message from Barbara Kamm CEO Feb »
Stockpile: Acquire and gift stock easily »
Barbara Kamm interviewed by Kathy Ireland »
Millennials: Saving for their future »
02/16 Social Security Seminar »
02/18 February REIT Seminar »
More than fifty years ago, forward-thinking high-tech employees at Fairchild Semiconductor knew there was a better way to bank.