By making the minimum amounts on your credit card, you are creating room for future financial disaster. This affordable amount will look convenient know but is really costly in the future.

Learn How to get the Minimum Payment

Each card company has a way of calculating their minimum payment. They use the primary factor as a certain percent of balance. Learn the criteria that you card uses to get the minimum balance and you will learn the effects of paying only that amount.

Illustration

We can take a card with a balance of $1,000 and an annual percentage rate (APR) of 18%. Since APR is given annually, you can get the monthly rate by 12 months to get a finance charge of 1.5% per month. Assume further that the company calculates the minimum payment at 2.5% of the balance.

Taking this figure we will get the payment for the first month by multiplying $1,000 by 2.5% to get $25. Now using the card’s monthly APR of 1.5%, you realize that will get that of only $10 of the $25 goes to the balance whereas $15 goes to the month’s finance charge. This will bring your remaining balance for the next month to $990. The minimum payment fro the month will be $24.75 or 2.5% of $990. Applying the APR $14.85 will go to the month’s finance charge and then $9.90 to the balance.

The example shows how small the amount of the loan that you repaid is compared to the entire amount that you made in the two months. Of the $50 in payments, the actual debt only reduced by $19.90. by paying the minimum amount only, you will be able to clear the whole amount in  153 months (13 years)  and having paid an interest of  $1,115.41!

Executing the Plan

It is real hard to clear the amount that you owe in debt while paying the minimum, more so when you have a few credit cards of which you make the minimum repayments for.

You will be able to put yourself out of debts by paying a figure greater than the minimum. It need not be a big figure you can send $50 for a card with a minimum payment of $40. The ten dollar that is really a small figure for most people will help reduce your principal loan faster. If you go increasing the amount proportionately each month, you will save yourself years of debt.