How Paying Just the Minimum on Your Credit Card is a Trap

How Paying Just the Minimum on Your Credit Card is a Trap

NEW YORK (MainStreet) —Remember what they say about corporate financial statements? That they are like bikinis: they reveal the essential but conceal the vital. Well, your credit card statement is a bit like that too. It tells you how much you spent and what you ought to pay, but puts all the information about interest and fees in the fine print, a place you’ll never look. Unfortunately, that’s where the devil lies. And here’s one such devil.

The minimum amount trap

“I used to pay only the minimum on my credit card,” a colleague once told me. “And in a few months I had piled on substantial debt that included a big interest component." He thought that's what the credit card company wanted him to do, and he learned the hard way.

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The minimum amount is usually around 2% of the total outstanding that you must pay each month to avoid a late fee. But what most people overlook is that paying only the minimum will still attract a hefty interest on the rest of the balance, including on any new purchases, that too on a compounded basis.

The numbers can be quite eye-popping. On a moderate credit card outstanding of $1,500, if you made only the minimum payment each month without adding anymore debt, it could take you up to 11 years to repay the entire amount at an interest rate of 15%. You would be paying a total interest of $1,413. If your balance was $5,000, you would be making repayments for 24 years and shelling out $7,246 in interest alone. Now if you also keep adding new debt, you will find yourself in a nasty situation.

Thanks to the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) of 2009, you can now find these numbers on your own credit card statement every month. The act requires issuers to include an information box on credit card statements showing how long it would take to pay off the balance on the card by making only the minimum payment. “When they see the numbers, a lot of people think it’s a mathematical error," said John Ulzheimer, President of Consumer Education at SmartCredit.com. "With a car loan or a home mortgage, you know right from the start how long it will take to pay off. But with a credit card, people don’t believe the debt can pile up like that.”

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