Your credit card bill contains several important pieces of information. Along with your transaction
history, balance and interest rate information, the bill also includes a “minimum payment” amount.
Depending on your financial situation at the time your bill arrives, as well as your spending habits, it may
be very tempting to pay only the minimum payment.
As tempting as that may be, DON’T DO IT. If you can’t pay your bill in full, pay as much as you can above
the minimum payment.
Interest charges can pile up very quickly, and in some cases you may even wind up paying far more than
your original balance.
Take a look at the following example:
John and Jane both have $2,000 of debt on their credit cards. Both cards require a minimum payment
of 3% or $10, whichever is higher. Both are short on cash, but Jane manages to double her payment to
$20 while John pays the minimum.
The yearly interest rate on both cards is 20% on an outstanding balance. What this means is that part of
the payment goes toward your balance and part goes toward interest on that balance.
Here is the breakdown of the numbers for the first month of John's credit card debt:
- Principal: $2,000
- Interest: $33.33 ($2,000 x (1+20%/12))
- Payment: $60 (3% of remaining balance)
- Principal Repayment: $26.67
- Remaining Balance: $1,973.33 ($2,000 - $26.67)
These calculations are done every month until the credit card debt is paid off.
In the end, John pays $4,240 in total over 15 years to absolve the $2,000 in credit card debt. The interest
that John pays over the 15 years totals $2,240, more than the original credit card debt.
Because Jane paid an extra $10 a month, she pays a total $3,276 over seven years to absolve the
$2,000 in credit card debt. Jane pays a total $1,276 in interest.
The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by more than seven
years!
The lesson here is that every little bit counts. Paying twice your minimum or more can drastically cut
down the time it takes to pay off the balance, which leads to lower interest charges.