Skip to main content

The Credit Card Minimum Payment Trap

The Credit Card Minimum Payment Trap will often lock you into debt forever. The minimum payment is usually 1%, 2% or 3% of your balance plus interest and any outstanding fees. 

The Credit Card will also have a minimum payment such as $45 or $35 when your balance gets that low.

Do not get into this trap as over the long term it will cost you a lot of money.  Solving the Trap is easy. Pay off your credit card every month.  


Credit Card Minimum Payment Trap Loan Examples


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


$6,000  Credit Card Loan Minimum Payment Trap

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


Your initial minimum payment $150, this will drop 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.


It will take 291 months (over 24 years) and you will pay $8,423 in interest  plus the $6000.  If you miss a payment your interest rate will go up and your credit score will go down.  You have spent 24 years in the Minimum Payment Trap.


If you charge anything else on this card that you plan on paying this month it will also be charged interest from the transaction date to the day they receive payment.   Any extra  purchases will not get float or grace period.


$500 Balance Minimum Payment Trap

You carry a $500 balance and you spend $800 per month for gas and groceries on the card every month but pay it down 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 $1,300 for the 12 days it takes to get the payment to the credit card company. 


($500*.015)+($400*.15)+(($1300*12)/30)*.015)= $21.30 interest per month


If you made the $821.30 payment you would still have a $500 balance.  


Pay off your Credit Card every month to stay out of 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.
Labels:

Comments

Post a Comment

Popular posts from this blog

My Introduction to Airline Miles

 I was first introduced to airline miles by a friend who had just gotten a United Airline Chase Credit Card .   I signed up and started getting airline miles for all of my business purchases.  Just for signing up I received 50,000 miles.  I believe I had to spend $3,000 in the first three months to get the 50,000 points.  This was a great bonus, two free flights anywhere in the US for spending $3,000 which I would have spent anyway.   The annual fee for this card is $95 which is waived for the first year. It took 25,000 airline miles to get one round trip ticket anywhere in the US.  Short flights would only cost 20,000 airline miles. I used just this Chase United card for a couple of years and earned a couple hundred thousand Airline Miles on the purchases my business made.   More Chase Points Cards I applied for and got more Chase credit cards for points.  I got the first Chase Freedom card with no annual fee.  This ca...
Post a Comment
Read more

How Home Loans Impact Your Credit Report

Home loans have a different impact on your credit score than credit cards. Since most home loans last for 30 years after a few years they are an excellent credit reference. That is if you make your payments on time. The monthly grind of making the Home Mortgage Payment isn't much different after a few years than paying rent.  The rent increases over the years while your Mortgage payment will stay the same except for tax and insurance increases.  For many households the increase in house prices creates the largest family asset. The Home Loan is often the longest loan to show up on your credit report.  It also shows lenders you can make payments over an extended period of time.   The size of your Home Mortgage payment when compared to your claimed income when you Apply for a loan may also have a significant impact.  
Post a Comment
Read more

Should I Carry a Balance On My Credit Card?

 No Many people think that it will help your credit if you carry a Balance on your Credit Card.  This is simply not true.   The only things that change if you carry a balance on your card is you will pay a high rate of interest and you will pay interest.   You do not need to pay interest on your cards to keep them active and for them to have a positive effect on your credit score.   Use each of your cards a few times a year and pay them off in full at the end of the month and they will stay open and eventually have a positive effect on your credit score.  
Post a Comment
Read more