Avoid The Minimum!
It’s a truth we all know to be self evident, yet we don’t abide by the teaching we know is true. Like cheering for our favorite small market baseball team every year hoping just once they might actually win a championship, paying the minimums on your credit cards is bad news. Taking your balance and stretching it out for years not only costs you significantly more than what you originally spent, you open yourself up to a whole slew of extra fees, charges and other such things until you get your balance paid off for good. That’s why the single most important piece of advice you can give anyone with a credit card is to do everything they possibly can to pay more then the minimum every month. Your credit card company may not like it, but you will be much happier to be free of long term credit card debt once and for all.
What most people don’t realize, however, is that not paying the minimum is actually a good phrase to live by with ANY credit account you have. It’s true! While it is obviously much more difficult to pay more than the minimum on your monthly mortgage, if you can muster enough extra cash to pay a little extra every month, you would be shocked at how much money you can save over the life of a 15 or 30 year mortgage. The same can be said for other credit accounts like your car financing or even something with a much lower interest rate like your student loan. Paying the minimum over a long period of time only serves to pad the pockets of credit card executives, and I think we all have better things to do with our money than that.
So, how does only paying minimums REALLY affect your own personal bottom line? Let’s take a look at the real life financial impact in terms of dollars and cents. Let’s say you have a credit card balance of $5,000 and your credit card company requires that you pay 2.5 percent of your total balance as your premium. Every card figures this number differently, it can be as little as 1 percent plus the interest charged to your card every month, or it can be as much as 5 percent. While no one wants to be forced to pay more than they have to every month, you are much better off with a card that charges 5 percent of the total balance every month as a minimum payment.
Let’s say your card charges you 18 percent interest. That equals out to a minimum payment of $125 per month for the first month with a slightly declining payment each month until the balance is completely paid off. How long will it take you to pay off that $5,000 balance? How about 26 years! It’s true. Over that period of time, you would pay over $7,000 in interest to borrow your original $5,000. If we boost the minimum payment to 5 percent, the terms drop considerably to a first month payment of $250, but it would still take you 9 and a half years to pay off your debt. Over that time it would cost you just over two grand in interest. If you have ever wondered about the true impact of only paying minimums, you have your evidence now.