Minimum payments on your credit cards mean maximum fees.
Banks and stores deliberately make the minimum payments small. This means you can borrow large amounts of money without a sizeable monthly payment. What it also means, and it is not obvious, is that there will be a large compounded interest amount on the unpaid balances for the banks and stores.
On every credit card statement you will see –if you only make the minimum payment — how long it will take you to pay off your principle as well as interest. Read this very carefully.
For example, on a balance of $1664 it will take 14 years and 8 months to fully repay the outstanding balance, assuming you only make the minimum monthly payment of $10.
Also, on a balance of $178.00 it will take 1 year and 7 months to repay the total balance if you only make the minimum payment of $10.
Here is how to calculate the real interest:
What would the interest be on a large minimum payment of a $150 on a $5000 credit card?
The credit card statement says its’ annual interest rate is 19.99%. But is it?
- Take your annual interest rate 19.99% and divide it by 12 months to get your monthly rate, so 19.99% divided by 12 = 1.67% for your monthly interest rate.
- Take the $5000 balance owed and multiply it by your monthly rate of interest, so $5000 X $1.67% = $83.25 which is the interest paid .
- Divide the $83.25 into your monthly payment of $150. That equals 55.5% which is the real interest you are paying when you only make $150 as a minimum monthly payment!
Think about it. It’s not hard to understand why the banks and stores like minimum payments. They make great profits at your expense.