Making only the minimum monthly repayment on your credit card could be costing you hundreds of dollars in unnecessary interest charges. It can also extend the time it takes you to repay your credit card debt.
Why You Should Pay More Than the Minimum Monthly Repayment
When you receive your credit card statement each month, you’ll see a minimum monthly repayment written on it. This is the smallest amount of money you need to make on your account each month by the due date to avoid being charged penalty interest and overdue fees.
Most people happily repay this exact amount every month, thinking they’re doing the right thing. Unfortunately, it could be costing them more money than they think and taking them far longer to repay their credit card debt than they realise.
Quick Calculations
To make it clear what kind of damage only paying the minimum monthly repayment could be doing to you, let’s look at an easy example.
Let’s assume you only owe $1,000 on your credit card balance and you’re paying $25 on your minimum payments each month. At an average interest rate, it will take you a little more than NINE years to repay your $1,000 balance in full. Over this amount of time you’ll also pay more than $400 in interest charges. That’s 40% of the amount you owe in just interest!
However, if you were to increase the amount you pay each month off your credit card up to 150 per month, then it would only take you 8 months to repay your entire balance and you’d only see around $40 in interest charges.
These are only small numbers, but consider that the average Australian has around $3,200 in credit card debt and the numbers are suddenly a lot scarier. After repaying the minimum payment each month for nine years on a $3,200 debt, you’d pay more than $1,280 in interest charges. That’s a lot of money to pay for items you won’t even remember you bought in nine years time.
Paying More Than Minimum Payments
There are plenty of ways to reduce the amount you owe on your credit card, but the quickest by far is to simply increase the amount you pay over and above the minimum monthly repayment shown on your credit card statement.
Remember that a minimum payment is exactly that – minimum. You are allowed to pay extra, so you owe it to yourself to find a few extra dollars each month to put towards reducing your debt and reducing your interest charges.
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Posted on Sunday, June 27th, 2010 at 5:17 pm
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