Credit cards: how to avoid curse of minimum payment
Long-term costs can be crippling learn how to use your card properly
"What many credit card holders often forget is that credit card companies charge on a 'revolving' basis, interest is charged on the balance remaining on the card each month. This is why the interest charges increase so rapidly," said Mr. Conway.
CREDIT card users who overpay the minimum payments on their credit cards by just a small amount can significantly reduce their borrowing costs and eliminate the curse of the minimum payment.
At the launch of its minimum payment calculator, moneycoach. ie says that many credit card users sometimes mistakenly believe the cost of using their credit cards to be between 17 per cent or 18 per cent when they carry a balance from month to month.
However, they can now estimate the potential savings they will make by simply adjusting their minimum payment, which could save them thousands of euro.
"A lot of people rely on credit cards as a convenient method of borrowing. And, while most will be cognoscente of the higher cost of borrowing associated with credit cards, many may not know the full cost of making the minimum monthly payment on their credit card where the long-term costs can be crippling," said Mr. Frank Conway, director with moneycoach. USING the example of a card holder who charges € 2,000 on the card over the Christmas period. Assuming for a interest rate of 18 per cent and a minimum monthly payment set at 2.5 per cent of the card balance, it would take the card holder 15 years and one month to pay off the debt and cost € 2,423 in additional interest payments.
In other words, the card holder would have to repay € 4,423 from having charged just € 2,000. The interest charged on the card amounts to 121 per cent of the original balance.
"What many credit card holders often forget is that credit card companies charge on a 'revolving' basis, interest is charged on the balance remaining on the card each month.
"This is why the interest charges increase so rapidly," said Mr. Conway.
Card holders can use a number of simple tactics to reduce the cost of credit if they are unable to repay their credit card balance in full. 1. Pay a little over the required 'minimum' payment: By paying a little more than the required minimum payment, credit card users can reduce their interest charges significantly.
Using the example cited above, if card users were to increase their minimum payment by just € 10 per month, they could slash their total interest charges from € 2,400 to less than € 800.
In addition, they will repay the balance in a little under four years as opposed to 15 years and cut their interest charge by two-thirds. 2. Play the switch and save game - card holders who continue to have good credit ratings should look to avail of 0 per cent offers from competing credit card companies. Because credit card lending can be so lucrative for credit card companies, several continue to offer 0 per cent deals.
While paying off a credit card balance is the best option financially, for those caught with little option but to carry some balance from month to month, increasing the minimum payment can have a significant impact.
"The option of using home equity loans to pay off credit card debt is no longer an option for hundreds of thousands of homeowners thought to be in negative equity. Unfortunately, credit card companies can be the lender of last resort for many people who may be struggling financially. However, they can still be smart about how they repay their balances to minimise the total cost of credit. "said Mr. Conway.
- Frank Conway
