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SolveYourProblem.com
Article Series: Debt Relief & Debt Consolidation
I Want To Get
Rid Of My Debt...NOW!
Stop Paying
the Minimum on Credit Cards
Credit cards are there to put you in debt and keep you in debt.
When they do it, they have one tool at their disposal that
is more effective than all the others. It’s called the minimum
payment.
What’s a Minimum Payment?
Your minimum payment is the absolute minimum that you must
pay off each month to avoid defaulting on the debt. If you
don’t pay your minimum, they’ll come after you – but don’t
make the mistake of thinking its just fine to only ever pay
that much.
Why are Minimums Bad?
They never used to be. Minimum payments used to be set at
relatively high percentages, anywhere from 5% to 10%. This
meant that you paid more, but your debt would get paid back
faster.
Credit card lenders realized, though, that they could set
the minimum payments lower, and collect a smaller amount of
money each month for a much longer period of time. This would
let them tell people that debts on their cards were ‘affordable’,
while they raked in the cash over the long term, thanks to
the power of compound interest.
Here’s an Example.
Let’s say you owed $1000 at an interest rate of 12.7% per
year (1% per month). Your minimum payment is 5% per month.
Remember that your payment goes towards the interest first,
and then the debt. In this example, $10 out of the $50 you
paid would disappear as interest – but $40 would still go towards
paying off the debt, meaning that your debt the next month
would be $960.
What happens if you change the minimum payment to only 2%?
Well, the difference is enormous. Sure, you’re only paying
an ‘affordable’ $20 – but $10 of it is still going on interest.
That means that your $20 has only paid back $10 towards the
debt, and you still owe $990!
There are so many people who just look at the interest rates
they’re being charged, and don’t understand the terrible difference
it can make if you only ever pay the minimum payment. In our
example (which is relatively typical), 50% of the payment was
going on interest – meaning that paying the minimum gets you
an effective 50% interest rate, even though your APR was only
12.7%. For higher interest rates, it only gets worse: there
are cards out there where only making the minimum payments
will actually cause you to owe more each month, not less!
So What Should You Do?
The answers aren’t fun, but they are true. First, look for
a card with a high minimum payment – this is a good way to
discipline yourself into paying off the debt faster.
Secondly, always pay more than the minimum if you can afford
to. I know it feels like money for nothing, but isn’t it better
to pay it now and get it over with, instead of paying it for
the rest of your life?
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by SolveYourProblem.com
: 2006
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