How many credit cards do you have in your wallet, two, four, or even more? That may be great if you are only carrying a small balance on one of those cards, however, if you are like so many throughout the last three or four decades who have learned to measure their personal wealth merely by being able to meet their minimum monthly obligations you are likely maxed out. Considering the average individual must pay for a place to live, has one or perhaps even two car payments, and a number of your charge cards, you may be leveraged way beyond your means when it comes to your revolving debt and we as consumers have been conditioned, over time, to ignore the real numbers and just focus on the credit card minimum payment.
Banks are in business to make money, and credit cards have paved the way to, exorbitant interest rates and late fees that have propelled many a financial institutions’ profits to levels never seen before, with terms and interest rates comparable to that of a 1970’s mobster loan shark. Granted, the penalties for late or unpaid payments are not nearly so violent or vicious with legitimate financial institutions, but the costs and consequential financial pain associated can be severe should you get in over your head.
Making Credit Card Minimum Payments – Why Pay More
Banks and other financial institutions depend on customers who consider only their monthly bottom line in association with their overall relative indebtedness, and for those who pay only their minimum payment; these are the consumers who drive the profits for these large financial institutions and who are more easily enticed into spending even more money with gimmicks and other supposed benefits. How many times have you received a credit limit increase for being such a great and responsible customer? If you have been making your payments on-time and consistently spending, you have likely received numerous credit limit increases all in the name of being responsible with your credit.
Your credit rating is determined by several factors, but one that many people know little about is the measurement of your credit spending to credit limit ratio. You will maintain a good credit score by keeping spending to about 30% of the total credit limit available to you or paying your debts off completely, however, when you exceed that limit your overall credit rating begins to degrade. Think about how easy it is for a bank or other lending institution to keep you spending and in a good credit standing by raising your credit limit incrementally and over time? Before you realize it, you are in for far more than you ever expected.
Most if not all of your minimum monthly payment is applied toward the accumulated interest on your credit card. Credit card minimum payments ensure maximum profitability for the banks and other investment institutions who participate in this highly profitable and lucrative business. Americans today owe more money than ever before, and in fact, indebtedness around the globe has increased to new and epic proportions. Given the fact that interest never goes to sleep, the situation will only continue to deteriorate unless individuals make genuine and measurable adjustments, which will assuredly be painful, to redirect more of their disposal income to the elimination of their personal debt.
Consider this illustration to understand just how much money you will be required to repay to the bank on a credit card debt of $8500 with an interest rate of 18% on a 2% minimum payment requirement.
- Your minimum monthly payment will be $170.00.
- By making only the minimum monthly payments and assuming you never charge another dime on your charge card, it will take 94 more payments or 7.8 years to pay off the remaining balance.
- Even more frightening, the interest will amount to $7,329.
- That’s only $1171 less than the original amount owed on credit card. In terms of percentage, it’s 86% of the original $8500.
- Is it any wonder so many people are struggling to make ends meet strapped underneath this kind of debt?
Now, let’s use the same example above and add an additional $100 to the minimum monthly payment requirement and the picture drastically changes.
- Now, instead of it taking 7.8 years to pay off the credit card debt, it will take 43 more payments or 3.6 years to it pay off (again that’s provided you have not added any additional debt to the credit card).
- Additionally, instead of paying $7329 in interest, now you will only pay $3090.
- That’s a savings of $4329.
The real trick to not making those minimum credit card payments is discipline, control, and regulation of your own desires and educating yourself on how your spending will affect your overall financial picture. Living within your means, especially if you want to start trying to pay down your debts is the only way to achieve financial freedom and there are a number of ways to assemble a plan to do so.
The first and best way to get a hold of your financial situation is too establish a real picture of your monthly budget. There are many pre-formatted budget tools available on-line to help you ascertain where you are right now, and what it will take to get you where you need to be.
Consider too, there may be other investments you are contributing to that are paying interest rates that are practically imperceptible. Rather than tying up money in an investment or savings account that pays you very little, it would behoove you to move or use some of that money to pay down a credit card where you are making only the monthly payment. In the long run, you will be far better served not to have the debt on the credit card than to keep money in a place where you receive only a minuscule return for your investment.
Everyone should have some savings stored up for an emergency. However, if you disproportionally save for a rainy day, but yet you carry an excessive amount of unsecured debt, you could end up in far worse financial shape if an unexpected circumstance should arise.
The key is making those small decisions on a daily basis and striking a balance between spending and saving.
