If you have ever researched the impact of making only the minimum payment on your credit card, you were probably shocked to learn how long it will take to pay off the balance.
The Merry Go Round of Minimum Payments
Making just the minimum payments on credit card debt puts you in merry-go-round of continuing payments.
If you haven’t read the fine print on your credit card statement, let me spell it out in a basic example:
- If you owe $4,000 on a credit card that charges 18% interest:
- Your Minimum monthly payment (3%) = $120.00
- Total Interest Charged = $60.00
- Amount of your payment applied to Balance $60.00
Your outstanding balance is now $3,940.00.
Fifty percent (50) of the one hundred and twenty (120) dollar payment made went to interest.
Cost of Minimum Payment on Credit Card Debt
By continuing to make only the minimum payment (which will change every month) it will take more than 15 years to pay off the initial balance. You will have paid about $3,700.00 in interest.
Your purchase has cost almost double the original price!
Department Store Credit Cards
And consider this for added shock value: many department store credit cards charge 28% interest.
This high interest rate means, using the above example, it will take more than 30 years to pay off the debt and you will have paid about 3 times more than the original purchase!
That’s like paying $20 for a cup of coffee. If I told you to set fire to your money you would think I was crazy but in effect that’s what you’re doing every time you make only the minimum payment.
Credit Card Fees and Debt
Now that you’ve picked your jaw up off the floor here’s the bottom line:
Credit Card companies are not in business to be your friend. They are in the business of giving you easy unsecured credit with the hope that the balance goes unpaid so they make money on interest fees.
They are in the business of making money and you’re basically giving them license to take your money if you’re making only the minimum payment.
Since credit cards are the most expensive form of borrowing, the best strategy is to take steps before credit card debt becomes a problem.
In my next blog, I’ll give some practical suggestions you can implement to avoid issues with credit card debt before they start.
In the meantime, if you’re struggling to make more than the minimum payments on your credit cards, we have solutions. At Yanch Dey, we can help you get off the credit card Merry Go Round.
About the Author
Brenda Owens is a licensed insolvency trustee having graduated from the Durham College Business Administration Accounting Program, with Honours, in 1993.
In October of that year, 1993 Brenda accepted a position with James R. Yanch, and received her Insolvency Trustee License in 2007 and started working as a bankruptcy trustee.
Over the years, Brenda’s ability to listen and thoroughly explain the insolvency and bankruptcy process and Consumer Proposals has helped hundreds of families regain financial control in Oshawa and Durham Region.