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When talking about credit cards, many people may own one or even more. A credit card is one of the most used payment methods for consumption.
Credit cards can solve the inconvenience of carrying cash, and provides an interest-free period for consumers to solve their emergencies.
However, consumers often ignore the terms and charges behind the credit card because of convenience. In addition, they probably will fall into the minimum payment trap.
Minimum repayment refers to the credit card minimum due you should pay every month, plus any fees and accrued interest.
The amount would be a specified amount such as 25$, or a percentage of the outstanding principal such as 1%, depending on whichever is greater.
As a savvy user, you shouldn’t underestimate the interest burden caused by the repayment every month when using a credit card.
Your total repayment interest could be twice to thrice of the amount you owed.
A credit card repayment is like a mortgage loan. For monthly repayments, interest will be paid first, the balance will repay the principal then.
After that, the balance will continue calculated at a compound interest rate. Normally, a credit card’s annual percentage rate (APR) ranges from 12% to 24%, the highest is 36%, some new credit cards will give a promotion period that offers 0%.
Assuming that your credit card has a debt of $10000, the minimum payment is $250, and the APR is 24%. Even if there isn’t any new transaction during the period, it still takes 82 months (about 7 years) to pay off.
As a result, the final repayment amount is $22,318.49, which means that interest expense has reached $10,000, which is equal to the principal.
If your credit card pays off within 3 years, you must repay at least $392.33 a month, and the final repayment amount is $14,123.83.
Your credit card monthly payment must exceed the interest. For example, the APR is 24% means that the monthly interest rate is 2%, your monthly payment must be over $200 if your debt is $10000.
Once your monthly payment is lower than the interest you should pay, you will never pay off the debt. Because your payment will pay the interest first.
If you can’t pay off the interest, it will accumulate to the principal caused the debt more and more.
Therefore, you should pay attention to the minimum payment and interest are reasonable or not.
Finally, you can use the free online debt payment calculator to help you get the best monthly payment amount and avoid this trap.
In order to reduce the stress, many consumers will choose to pay the minimum payment. In fact, this behavior is like taking drugs, which has many disadvantages.
1. The minimum payment interest is calculated based on compound interest, APR can be up to 36%. It will first be used to pay interest and financial expenses, then pay in principal. It’s no surprise that the total interest you pay is over your owed.
2. Only pay the credit card minimum payment for a long time, it may affect your credit score. Financial institutions will question your ability to repay.
3. When you choose to pay the credit card minimum payment, all new transactions, existing interest-free installment, and automatic credit card payments such as monthly insurance will be interest-calculated immediately.
Even though the minimum payment can solve the stress for a while, but it is easy to make you fall into a long-term debt crisis.
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