A lot of individuals using credit cards for their everyday purchases, will usually pay the minimum requirement when they receive their credit card statements. The problem with this is that the remaining balance usually starts accumulating, and also the interest rate always goes higher every month. Then one day, you receive your credit card statement and paying even the minimum balance becomes a problem. This is one of the many reasons why you should always pay the full amount of your credit card debt, if possible. Corrie Herring gives an illustration on the effect of paying the minimum requirement in the following article.
Credit card has been part of the necessity for most people, because it provides the convenient in purchasing almost anything at anywhere. But, not all consumers will pay in full amount on what they have spent every month when they receive their credit card statement; instead, they just pay the minimum. The balance will become their debt for next month. The debt keeps rolling, and snowballing month by month until they feel the pressure when it becomes a financial burden. Do you know the true cost of just paying the minimum on your credit card debt? You will be surprised when you make the true calculation on how much the costs in term of dollar, and time you need to pay for the convenient of using credit card.
In order to have a better picture on the true cost that you need to spend to clear your credit card debt by just paying the minimum amount of the monthly balance, let’s use a case scenario with a few assumptions:
John Hudson has 3 credit cards with balances. The amounts & interest rate for these three credit cards are as below:
1. Card 1: $5,000 balance with 12% interest rate.
2. Card 2: $3,500 balance with 18% interest rate.
3. Card 3: $2,000 balance with 16% interest rate.
John is paying the minimum amount on each credit card. For ease of calculation, we assume John did not add more debt into the existing credit card, but keep paying only the minimum amount due each month to meet the 5% requirement in the credit card contract.
One day, he has decided to calculate the cost to clear his credit card debt, and he was surprised with the findings.
The True Cost:
By paying just the minimum, which is 5% on his credit card balances, the interest and the time required to clear each credit card is as below:
1. Card 1: $5000 balance with 12% interest rate
John will take 8.5 (102 months) years to clear the debt, and paying a total of $1224.27 on interest.
2. Card 2: $3500 balance with 18% interest rate
John will take 8.75 years (105 months) to clear the debt and paying a total of $1453.88 on interest.
3. Card 3: $2000 balance with 16% interest rate
John will take 7.17 years (86 months) to clear the debt and paying a total of $688.71 on interest.
The calculation results show that John need 7 to 8 years before he can become debt free, and he needs to spend $3366.86 (32% of total debts) for his $10,500 debt, if he is paying just the minimum amount to meet the credit card contract’s requirement.
This is just simple case scenario. In the real life, most people tend to pay the minimum while continuing using their credit cards that make more debts into the existing balances. Hence, the true of costs in terms of dollar and time will be much higher than this simple calculation.
It is very costly by just paying the minimum amount on your credit card debt. You need to pay much more in interest (over 30% of the total debt as the above example) and need a long time (7 to 8 years in example above) to achieve a debt free life.