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The Credit Card Minimum Payment Trap

The Credit Card Minimum Payment Trap

One of the most common traps that people of all ages get into is the Credit Card Minimum Payment Trap. 

The minimum payment is usually between 1% to 3% of your balance plus interest and any outstanding fees. 

The Card will also have a minimum payment such as $30 or $20 if your balance ever gets that low.    


Until I ran these examples I did not realize how expensive it was to pay the minimum credit card payment and how long it would take to pay off a balance by just paying the minimum.


Here are some excellent Minimum Payment Trap examples I have created using the Bankrate.com Credit Card Calculator.


$6,000 Borrowed on your Credit Card.

Credit Card Terms for this example: 18% interest  1% Minimum payment, $30 minimum payment.


Your initial minimum payment $150. Your payment will drop a little every month as you pay down the balance.  The first month you will pay $60 in principle and $90 in interest.  The second month $59.40 principle and $89.10 in interest. The interest adds up faster than the paydown on your credit card loan. You are Paying More in Interest than Principle. This is normally the case when you make are stuck in the minimum payment trap on a credit card.


291 Months Later Your Credit Card Is Paid Off

It will take 291 months, over 24 years and you will pay $8,423 in interest and the $6,000 you borrowed.  You will pay a total of $14,423 for the $6,000 loan on your credit card. If you miss a payment your interest rate will go up and your credit score will go down and late payment charges will be added.  


If you charge anything else on this card this month, it will also be charged interest from the transaction date to the day they receive payment.  


Carrying a $500 Balance on Your Credit Card

*Example #2

You carry a $500 to $1,000 balance and you spend $800 per month for gas and groceries and work expenses on the card every month. Every month you pay down the balance to at least $500. 


So the $800 is spent evenly over the month and you pay within 12 days of the statement.  You will pay 1.5% on the $500 balance for 30 days and ½ $800 for 30 days and then also for the $800 for the 12 days it takes to get the payment to the credit card company.  ($500*.015)+((800*12)/30)*.015)= $12.30 interest If you made the $812.30 payment you would still a have a $500 balance.  


If you carried no balance on the card you would save $150 a year in interest. Your $500 average unpaid balance cost you $150 last year.


Avoid the Minimum Payment Trap

If you did not pay off your card last month you will be charged interest on your purchases from the date of the transaction to the date the payment is received.  If you paid off in full your card you will get both float until the statement prints and a grace period of up to 21 days.


NO GRACE PERIOD OR FLOAT FOR YOU

That is right you do not get a grace period or float on your purchases if you did not pay off your credit card last month. Check out my article on how Grace Period and Float work for you.
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