Pay
More Than The Monthly Minimum On Your Credit Card
Each credit card statement
you receive includes a "minimum payment" amount along with transaction,
balance and interest rate information. Depending on other parts of your
financial situation and your spending habits, the temptation to pay only
the minimum can be great. As tempting as it may be, you should always
try to pay more.
Credit card companies
usually calculate the monthly minimum payment due as a percentage of your
outstanding balance. The percentage is usually more than the interest
rate they are charging on your balance, but low enough to make the minimum
payment amount seem attractive. After all, they make money by charging
interest on what you owe.
The cost of paying
only the minimum
As you consider how much to pay each month, be sure you understand how
all the numbers work. To keep it relatively simple, let us assume you
have an outstanding balance of $5,000, the annual interest rate being
charged is 12% (1% per month) and the minimum payment is 2% of your outstanding
balance. If you just pay the minimum of 2% ($100) and have no additional
charges, $50 of the payment goes to pay the interest and your balance
is paid down to $4,950. If you continued on that schedule, it would take
you 299 months (almost 25 years) to pay off the balance. On the other
hand, if you paid $250 each month, you would have the balance paid off
in about 23 months.
As a practical matter,
unless you stop using a card each month you will have additional charges,
interest will be charged and you can decide how much over the minimum
you wish to pay. Here are some charts that show how this could work.
Example 1.
Assume you start with a balance of $5000, have an additional $500 or $400
of charges each month and have a credit card with a 12% interest rate.
With
$500 of additional charges each month

With
$400 of additional charges each month

Payment
level

#
of Payments needed to pay off the balance

Payment
level

#
of Payments needed to pay off the balance

$600

70

$600

29

$700

29

$700

19

$900

14

$900

11

$1,000

11

$1,000

9

Example 2.
Assume you start with a balance of $5000, have an additional $500 or $400
of charges each month and have a credit card with a 16% interest rate.
With
$500 of additional charges each month

With
$400 of additional charges each month

Payment
level

#
of Payments needed to pay off the balance

Payment
level

#
of Payments needed to pay off the balance

$600

83

$600

31

$700

31

$700

19

$900

14

$900

11

$1000

11

$1,000

9

Paying more than the
monthly minimum will eliminate the balance much faster, save you considerable
interest charges and provide some peace of mind knowing you are taking
a prudent action.
Pay more than the
minimum
Here are five ideas for finding cash to make the payments and reducing
your credit card balance faster:
 Stop using the
credit card. This simple idea will result in more of your payment being
used to reduce a balance that is not growing due to usage.
 Use cash for more
of your purchases. Fewer monthly charges will bring you balance down
faster.
 Consider using
some of your savings to pay down the balance. The rate you are earning
on your savings is probably much less that what you are being charged
on your balance. While no one likes the idea of depleting savings, if
you can reduce your expense (interest charged) by more than your income
(interest received), you will end up ahead.
 Consider some
other type of loan. The interest rates charged on home equity loans,
mortgages and even auto loans would probably be less than what is charged
on your credit card.
 Cut back on your
total spending. Conserving some cash, even for just a few months, and
using it to make larger credit card payments can make a difference.
It may even develop into a good habit.
