When you use your credit cards, it’s important to be smart about how you do things.
Unfortunately, credit card issuers actually want you to make poor decisions. They make more money when you engage in certain practices. The truth is that the best credit card customer is the one that racks up credit card debt, and then pays only the minimum each month.
If you want to avoid getting deeper into debt, and wasting more money on interest payments, you need to watch out for the credit card minimum payment trap.
The Cost of Only Paying the Minimum
One of the reasons that credit cards are so attractive is because paying the minimum payment is often low enough to be attractive.
The minimum payment on a credit card makes something that would normally be out of reach seem manageable. Many of us would be reluctant to buy $5,000 worth of stuff all at once. However, if you put it on a credit card, and have a relatively low minimum payment, all of a sudden, that $5,000 seems affordable.
And that’s the trap.
You focus on the monthly minimum payment and forget about how much you will actually pay in the long run, as well as how long it will take you to repay your obligation. Bankrate’s minimum payment calculator offers a sobering look at how much it costs if you pay only the minimum.
Let’s say that you have $5,000 on a credit card with 15% interest.
Your minimum payment is interest + 3%, or $150 each month. That doesn’t seem like very much for a lot of people. However, if you pay only the minimum payment, it will take you 14.5 years to repay that $5,000 — and you will pay $3,365.07 in interest. That means your total repayment amount will be $8,365.07.
You can see how only paying the minimum is a very costly proposition.
If, on the other hand, you decided to add $50 a month on top of that minimum payment, you can pay it off in 31 months (less than three years), and pay $1,032.66 in interest, or just over $6,000 total. That’s a much better outcome than toiling with the minimum payment for more than 14 years.
Be aware that thanks to the Credit Card Act of 2009 you will see how long it will take to pay off your balance on if you only pay the minimum and how much it will cost you in interest. This will be on your monthly statement.
Be the Kind of Consumer Credit Card Issuers Dislike
Instead of being the kind of consumer credit card issuers love, work on being the kind that they dislike.
The fact of the matter is that you are a more valuable customer if you can keep making minimum payments for more than 10 years. You end up paying more interest, and you represent a steady stream of income.
However, this state of affairs is detrimental to your financial situation.
Think of what you could do with that money if you weren’t paying it straight into someone else’s pocket in the form of interest!
Best credit card practice is to save up for the things that you want, and using a rewards card to pay for it. Save up for your purchases, use your credit card, and then pay off the balance when the statement arrives.
That way you receive rewards from the credit card issuer, but you don’t pay interest.