All the brightly coloured decorations from Christmas have been put away, but for many people a less than pleasant reminder of Christmas will soon be arriving in the mail – their credit card bill. Some people will be ready to pay the bill off in full when it arrives, but for many others, this will not be the case. The most important thing is to have a plan to get that debt paid off as quickly as possible. Carrying a balance on your credit card can add up very quickly.
Some people may look and say “I owe $1000.00 on my credit card. No big deal. The payment is only small. I can handle it.”. Yes, it is true, the minimum payment will not be large – but the long term cost of that $1000.00 is a different story altogether.
Here is an example:
Interest Rate: 19.9%
Minimum payment: 3% of balance or $20.00 – whichever is greater
Paying the minimum payment only it will take you 6 years and 7 months and cost you $723.86 in interest. That is assuming that you did not use the card again. This is 172% of the original amount! We are also not factoring in any annual fees your credit company may charge you.
By paying $10.00 over the minimum payment it would take 3 years and 8 months and cost you $389.90 in interest. This is an improvement, but still leaves you paying 139% more than you borrowed. Again, we have not factored in any annual credit card fees.
If you pay a fixed amount of $100 per month, you will be able to pay off the debt in a year and pay $102.40 in interest.
It is clear that having a definite plan with a fixed payment amount is essential to getting your credit card paid off. It is very easy to get caught in the minimum payment cycle, but it is not good for your finances as you are paying a great deal more for the items you purchased on credit than they are worth.