How to Use Your Credit Cards Wisely
Credit cards are a payment tool. They’re used to make it more convenient and easier to pay for purchases. However, it’s important to always remember that you still have to pay for your purchases and that means paying your credit card bill.
When you receive your bill, you’ll see that there’s a minimum amount due on the bill. In most cases, this amount is significantly less than the total of the bill. It’s sometimes tempting to only pay the minimum amount due. However, that is not ever a smart decision and it’s one that could end up costing you a lot more money in the long run.
So, What’s the Real Cost of Making Minimum Payments on Credit Cards?
All credit cards offer interest-free credit from purchase to payment date.
As long as you pay your bills in full, you won’t owe any interest. However, if you do not pay your balance in full, you will pay a very high interest rate.
As an example, imagine you have an outstanding balance of $2000 on a credit card.
That means the minimum payment would be 2% of the balance: $40.
If you only make the minimum payment of $40, it will take 30 years and 10 months to pay off the balance in full.You will end up paying $5931.11 in interest during that period.However, if you increase your monthly payment to $100 instead of $40, it will only take you two years to pay off the balance and you will pay $395.65 in interest.
It’s also important to note that making only the minimum payments on your credit card can impact negatively on your credit score. You should also remember that, at any point, the credit card company can increase interest rates or change the terms of your card – at any time – and you’ll be forced to play by the new rules.
Alternatives to using a Credit Card
If you’re making a purchase and you know that you won’t be able to pay off the balance in a timely manner, you may want to consider a home equity loan or a vehicle title loan instead of using a credit card. One main reason for doing this is that the monthly payments on a car title loan or a home equity loan include both interest and principle, unlike the minimum payments on a credit card.
Another reason is that, while many credit cards charge interest rates between 19 and 29%, many car title loans and home equity loans charge interest that is much lower (usually between 5.75 and 10.95%.)
In addition, home equity loans and car title loans are secured and insured. This is different from credit cards that are just insured. Finally, home equity and car title loan payments end within a fixed term while a credit card loan can go on indefinitely and keep growing your total interest and debt.
If you find yourself in too much debt and cannot pay off your credit cards, you may have to speak with a trustee who can help you examine other options such as filing a proposal or declaring bankruptcy.