Minimum Payments Add Up

By: Martin Lukac
Submitted: 2007-01-17 16:17:39
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When it comes to your credit cards, the single largest mistake you can make is to only pay the minimum balance. Interest works against you when you borrow money. This is especially seen with credit cards. No one tells you how much you are paying back over the years. No one tells you how long it is going to take to pay off that credit card debt.

Most credit card companies still set their minimum monthly payments at 2% of the outstanding balance. They set it this way so that they can charge you more interest over time. With each month comes a new finance charge on your account.

Sometimes it is tempting to only make a minimum payment. Some people just don't want to sacrifice to pay off their cards. But the fact remains, the longer you wait to start paying off that card seriously, the more it is going to cost you.

For example, you have $5,000 on a credit card with an 18% interest rate. If you make a monthly payment of $250 a month, you will pay off your card in two years. You will have paid $986 in interest to the credit card company.

If you only make a monthly payment of $100 a month, it will take you eight years to pay off the card. You will pay the credit card company $4,311 in interest charges. That is almost double your original balance.

If you only pay the 2% minimum each month, you will be paying on this debt for 46 years. Forty-six years! The amount of interest you will repay to the credit card company is $13,926. A lot more than you ever borrowed.

Do you really want to spend the rest of your life paying this card off? You may think that the minimum payment saves you money. It does for the month, but in the long run, you are paying much, much more.

Sit down and create a plan to pay off your credit card debts. Don't simply go at this blindly. Set yourself a timeline and a dollar amount you can pay each month. The snowball method is a method that works for many people and is worth a try.

First, you list all of your credit cards in order of interest rate. Go from highest rate to the lowest interest rate. List the outstanding balance, monthly payment and interest rate. Add up your outstanding balances and monthly payments. Over time, you should see this number going down.

Look to your monthly budget to determine where you can find money to put towards your debt repayment. Add everything you can to the number one card on the list, while continuing to make minimum payments to the remaining cards. When the first card is paid off, you roll the entire amount you are paying a month down to card number two. You keep going down the list, building momentum as you pay off cards.

The key is to no longer use any of your credit cards. No matter what. Don't do it. Either cut them up or put them in your safe deposit box at the bank. You are eliminating your debt here, not finding a way to be able to charge more.

Minimum monthly payments can cost you a lot of money over the years. When you think that the average person has eight to ten credit cards with a balance of $8,400 on each, you realize that most people won't pay off their credit card debts before they die. Don't be one of those people. Get rid of them now and start saving for your future

Article source: Expert Articles