Tips for Successful Personal Finances
The New Credit Card Act of 2009 takes effect on February 22, 2010 To help you prepare, my blog will feature Nine Tips over the next three weeks.
Tip Number Six
How do you handle your credit card payments? Do you pay the balance very month, or do you only pay the minimum?
Your bill will now include a section that tells you how many months it will take to pay off your credit card balance if you make only minimum payments. That will be an eye opener for some of us.
Reader Question: My credit balance is $3,000.00. What will happen if I only make minimum payments each month?
A credit card minimum payment is usually about 1.5% to 2.5% of your balance. That’s a very small amount. Since I don’t know your interest rate, I’ll do calculations based on a 12% interest rate. In your case, that would be about $45 per month.
If you are paying the minimum payment it will take you a really long time to pay off your credit card in full – at $45 per month it will take you 411 months or 36 years. This is assuming that you will not be making any additional charges.
Credit card lenders make their money from the interest they charge you. Your objective is to pay as little interest as possible. When you pay your credit card balance in full each month you save yourself a considerable amount of money.
“Can you tell me how long it will take to pay a $2,000 credit card balance? I’m paying the minimum every month and the balance doesn’t seem to be going down.”
You could be right about the balance. First thing that you should know is that credit card minimum payments are only about 1.5% and 2.5% of the balance. So for a $2,000 balance, that would be between $30 and $50 per month. Included in that minimum payment is the finance charges (that’s how the bank makes its income – from the fees). To let you know how long it would take to pay off, I would need your interest rate (which I don’t have), but here are two examples:
$2000 Credit Card Balance at 6% Interest
| Rate | Minimum Pmt | Pay Off Time |
| 6% | $30 | 80 months or 6 years |
| 6% | $50 | 45 months or 3 years |
$2000 Credit Card Balance at 12% Interest
| Rate | Minimum Pmt | Pay Off Time |
| 12% | $30 | 108 months or 9 years |
| 12% | $50 | 51 months or 4 years |
You can see that little of your payment is actually going towards reducing the $2,000 balance. The estimate above also assumes that you aren’t using the credit card to make more purchases.
You do have a couple options for a quicker payoff.
Option 1: Pay more than the minimum amount. Paying as little as $10 more per month will help you see some progress. You’re saying you don’t have an extra $10 to spend on your payment? Take a look at your spending habits and see where you can come up with that money. Bring your lunch to work, borrow books and movies instead of buying, and get your hair cut every 7 weeks instead of every 6 weeks. Little things add up. The great thing about this, is that it’s temporary. Once your debt is paid off, you can breathe a sigh of relief, and go back to the 6 week haircut or treat yourself to a rental. Or, you may find you have new habits that will allow you to start saving money.
Option 2: Lower the interest rate. You can do this by transferring the balance to another card that’s offering a zero percent rate or a low rate. These are limited time offers. If you don’t pay it off on time, you’ll get charged interest again. Make every effort to pay off the balance before the special offer is up. This way you can make sure that most or all of your payment is going toward the balance and not toward fees.