Beware of Falling Minimum Credit
Card Payments
More
and more credit card companies are moving to requiring a minimum
payment of 2% of your total outstanding balance
If you opened a credit card
statement recently and were pleasantly surprised to find that your
minimum payment due was lowered, don't be so quick to "jump for joy".
What may appear as a small boost to your monthly budget is actually the
rock that can weigh you down in debt for a lifetime.
More and more credit card companies are moving to requiring a minimum
payment of 2% of your total outstanding balance. Consumer Action, a
consumer advocacy group out of San Francisco, found that the number of
card companies with a 2% minimum payment reached 53%, up from 43% just
a year ago.
Some creditors have even gone so far as to call this a "consumer
friendly" move claiming it will assist consumers faced with today's
economic woes. In reality, a lower minimum payment causes you to take
longer to pay off your debt to the creditor while winding up paying
them more money in interest payments.
For example, let's say you have a credit card debt of $2500.00 @18%
annual percentage rate (APR). Your monthly minimum payment based on a
2.5% pay back rate would be $62.50 per month. Oh and by the way, here's
what the credit card company really doesn't want you to know - it will
take you 20 YEARS to pay off your $2500.00 balance paying the minimum
monthly due. And you will have paid the credit card company $3,365.51
in interest!
Now lets look at the same example using the rate of 2% minimum monthly
payment. Your monthly payment drops to just $50.00 a month. You might
be tempted to think "wow, I've got an extra $12.50 a month to play
with, yippeee!". Not so fast! That lower minimum payment now means it
will take you 34.5 YEARS to pay off your balance of $2500.00 and you'll
wind up paying $6,430.93 in interest!
Consumer Action also reports that many credit card companies are
imposing higher late payment fees and "more than a third of card
issuers said they will raise existing cardholders' rates because of
poor credit histories -- with other creditors -- even if the consumer
has made regular, timely payments with that issuer".
My advice is to watch your use of credit carefully, always pay more
than the minimum monthly due, and be sure to read the fine print on any
credit card offers or changes to your existing accounts.
© Author: James H. Dimmitt
James is editor of "TO YOUR CREDIT", a weekly free newsletter. |
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