Don't Get Caught in the Minimum Payment Trap

Smart shoppers know to look for good deals.  We look for ads in the Sunday paper, listen for commercials on the radio, and hear from our friends about our favorite stores having a sale.  When you find that perfect item at the perfect price, do you pay for it in cash?  Do you use a credit card with a zero percent introductory rate, and then pay it all off before the introductory period ends?  Or do you swipe a high interest credit card and figure you'll pay it off eventually?  Paying interest on purchases can wipe out all the savings you've found at a sale.  Carrying a balance and paying only the minimum payment each month can end up costing you a lot more in the long run than the item is worth. 

Let's just say you've been waiting for a flat screen LCD to go on sale.  It's normally priced at $2500, on sale for 20% off, sale price of $2000.  That looks like a great deal!  It can be a great deal if you are disciplined in how you pay for it.  If you pay for it with a credit card and only make the minimum payment of 2% or $10 that many card issuers are currently requiring, it will take as long to pay off the t.v. as it could take to pay off a home mortgage, and that's if you never use your credit card again!  Let's look at some examples with different interest rates and different repayment plans.  Then you can make an informed decision and really get the most from your smart shopping.

$2000 financed with your credit card: 

As you can see above, the more you can pay to your credit card balance, the better off you will be.  No matter what you're card's APR is, you will benefit by paying down the balance as quickly as you can afford to.  The APR of a card really doesn't have a huge influence on your finance charges if you pay your balance down quickly.  A person who charges $2000 on a 20% APR card is only going to pay a little over a hundred dollars more than someone who makes the purchase with a card that has an APR of 10%, as long as it's paid off within a year.  It's when you get caught up in the minimum payment cycle that you really get hit.  Can you imagine paying over $10,000 for a $2000 television?  In the time it would take to pay it off by making the minimum payment, that fancy LCD will be obsolete and will have been replaced many times over.

The numbers above are based on making one large purchase and never charging another thing on your credit card.  Most of us don't spend that way.  We use our card every month, continually adding to the balance.  The goal is to continually pay down the balance faster than you are adding to it.  If you currently have a $2000 balance, and the balance is getting larger every month, you are going to pay much more in finance charges than the numbers above.  If you carry a $2000 balance and pay the entire amount of only the new charges each month, you are not making a dent in the original $2000, and finance charges will continue to increase your balance owed, even if you pay off new charges.

Making the minimum payment should only be considered if you have a need to stretch your dollars due to a hard month.  Repairs, medical emergencies, or temporary job instability may make it necessary to pay as little as you have to, just to get by for a short while.  It may be the only way to stay ahead of your bills, and the low minimum payment can relieve some of the burden of your financial responsibilities.  Just don't forget that finance charges will accrue no matter what hardship you are bearing, so try to catch up as quickly as you can when things turn for the better. 

If you habitually pay only the minimum payment on all your credit cards, you are paving the way to be in perpetual debt.  I hope the numbers above have helped you see how much it really costs to use your credit card.  It may take a long time to pay off the credit cards if you don't have a lot of extra cash each month, which is likely to be the case if you are used to spending on credit and making small payments.  Even if it takes years to pay down your credit cards, it will be worth it and you will be financially rewarded for taking control of your debt.  You must prioritize your finances and cut out the unnecessary spending.  You might have to do without some of the luxuries you've grown accustomed to for a while.  However, if you develop a plan to pay your credit card debts faster than you incur new charges, you can eventually get your debt down to a level you can pay off each month.  Once you do that, you can again enjoy some of the extras, since you'll be saving money on finance charges. 

Source:
webwinder.com
credit card interest calculator