Credit card debt. Are you only paying the minimum?
Are you aware how much you've paid in interest on your credit card over the years? Do you know how long it will take to pay off a £1,000 balance by paying the minimum each month?
So, you've got a credit card? Its outstanding balance is £1,000, and each month, although you intend to pay more, you end up simply paying the minimum payment (which is usually between 2% and 3% of the balance, depending on the credit card company).
So how long will it take you to clear the debt assuming a 2% payment each month, and a (quite tame by credit card standards) APR of 14%? 2 years? 5 years? No, it would take a staggering 19 years to pay off the debt, and that's assuming you never use the credit card for any other purchases. Not only that, but in that time you will have paid well over £1,000 additional interest, effectively doubling your debt.
But of course, that's why the banks set the minimum payment as low as they can. The longer it takes you to pay off your balance, the more they get from you in interest. If they increased the minimum amount to 5% per month you'd pay the debt back in 6 years, and save nearly £1,000 in interest.
Recently the government has tried to get credit card companies to state clearly on statements that paying the minimum will increase the length and cost of the debt, however few do, and the ones which do will generally say something along the lines of "Paying just the minimum is not recommended". Nowhere will it tell you it'll take 19 years to pay off £1,000.
Ideally of course, you should avoid paying any interest at all, and that generally means paying off your balance in full each month, however that's not always possible. But even a little extra each month helps. In the 19 year example, paying just an additional £10 each month would reduce the debt to zero in just over 5 years, and would save you over £750 in interest.
So the next time the credit card statement lands on your door mat, please pay more than the minimum!
(c) Copyright 2006, Adam Stevens. All rights reserved.
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