Pay It Off!
In order to get out from under the burden of debt and get ahead financially, you need to face the uncomfortable truth that it could take you thirty years to pay off that credit card balance. It may sound obvious, but one of the most important things to realize about credit cards is that the credit card company's goal is to make money from your account. When they establish a low minimum monthly payment, they're not trying to do you a favor; they're trying to maximize their profits. When you pay the minimum payment, it's good for them, but not for you.
Until recently, the minimum monthly payment for most credit card companies was around 2 percent of the balance, including interest. If you made a purchase of $2,500 at an annual interest rate of 18 percent, it would take you almost twenty-eight years to pay off the balance by making the minimum monthly payment. Initially, 2 percent of your balance would be a minimum payment of $50.00, with around 75 percent, or $37.50, going toward interest and only 15 percent, or $13.50, reducing the amount you borrowed. You can see why it would take so many years to pay off your balance.
By the time you paid off the $2,500, you'd end up paying interest of $5,896 in addition to the $2,500 principal you borrowed. Your $2,500 item will have cost you $8,396. How can you ever get ahead financially if you're paying such exorbitant prices? Next time you're tempted to use your credit card, think about the real cost of the item you're buying. You wouldn't pay $8,396 for an item that is clearly marked with a $2,500 price tag, would you? That's exactly the type of inflated price you're paying when you make only the minimum payment each month on a credit card with an interest rate in the teens.
Around 2005, banks came under increasing pressure from regulators to increase the minimum payment. Some companies moved faster than others, but most moved quickly to raise minimum payments to 4 percent from 2 percent. While this helps you eliminate debt more quickly, it doesn't solve the problem for you.
By paying credit card interest of $50 a month you've lost the opportunity to invest that money: $50 a month invested at 8 percent would total over $62,000 in twenty-eight years, the time it would take you to pay off a $2,500 balance if you make the minimum payment.
You should be absolutely unwilling to pay only the minimum balance on your credit cards each month. If you can't afford to pay more than the minimum payment, can you really afford whatever it was you charged to the card in the first place? Instead of paying the credit card company each month, you could put the money in a savings account until you have enough to pay cash for the item. If you need to buy on credit, at least do it with your eyes wide open.
