It's easy for credit-card debt to spiral out of control — and the option of paying just the minimum amount doesn't help.
Most credit cards only require you to pay 1% to 3% of your balance each month, which can be an alluring prospect if your budget is tight. That's why the option is there — if you can't afford to pay your balance, you can at least keep a record of consistent and timely payments to the credit-card company.
However, taking that route will cost you in the long run. Interest rates vary depending on the card, but credit cards charge an average of 15% on unpaid balances. If you truly don't have the money, paying only the minimum might be your only option. But if you have other options, like diverting money from another part of your budget or cutting back on spending to free up your cash, you'll want to take them. In the long run, paying only the minimum will cost you a fortune.
To illustrate just how costly paying only the minimum can be, check out the chart below from Linda Davis Taylor's "The Business of Family: How to Stay Rich for Generations," which reveals how charging $100 per year and paying the minimum would result in you paying $2,500 in interest after ten years:
(Linda Davis Taylor)
Taylor's model is fairly conservative, as $100 a year is a pretty small amount.
If we take a look at a scenario where someone is already in debt, the numbers are much more shocking.
In "The Debt Escape Plan," Beverly Harzog poses a hypothetical situation where a person is $10,000 in debt, all on one credit card, with an APR (interest rate) of 15%. The minimum payment is interest plus 1% of the balance.
"In this example, your minimum payment for the first month is $225," Harzog writes. "If you only make the minimum required payment every month, it will take you 335 months — that's 27.9 years! — to pay off your debt. During these 27.9 years, you will have paid $11,979.29 in interest."
It may not seem like you're saving money by paying more than you need to each month — or, preferably, making payments in full right off the bat — but if you don't, you'll spend thousands of unnecessary dollars.
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