Tuesday, May 05, 2009

Beware of Falling Minimum Payments

If you opened a credit card statement recently and were pleasantly surprised to happen that your minimum payment owed was lowered, don’t be so quick to “jump for joy”. What may look as a small encouragement to your monthly budget is actually the rock that tin weigh you down in debt for a lifetime.

More and more than credit card companies are moving to requiring a minimum payment of 2% of your sum outstanding balance. Consumer Action, a consumer advocacy grouping out of San Francisco, establish that the number of card companies with a 2% minimum payment reached 53%, up from 43% just a twelvemonth ago.

Some creditors have got even gone so far as to name this a “consumer friendly” move claiming it will help consumers faced with today’s economical woes. In reality, a lower minimum payment causes you to take longer to pay off your debt to the creditor while winding up paying them more than money in interest payments.

For example, let’s state you have got a credit card debt of $2500.00 @18% annual percentage rate (APR). Your monthly minimum payment based on a 2.5% wage back rate would be $62.50 per month. Oh and by the way, here’s what the credit card company really doesn’t want you to cognize - it will take you 20 old age to pay off your $2500.00 balance paying the minimum monthly due. And you will have got paid the credit card company $3,365.51 in interest!

Now allows expression at the same illustration using the rate of 2% minimum monthly payment. Your monthly payment driblets to just $50.00 a month. You might be tempted to believe “wow, I’ve got an extra $12.50 a calendar month to play with, yippeee!”. Not so fast! That lower minimum payment now intends it will take you 34.5 old age to pay off your balance of $2500.00 and you’ll wind up paying $6,430.93 in interest!

Consumer Action also reports that many credit card companies are imposing higher late payment fees and “more than a 3rd of card issuers said they will raise existent cardholders' rates because of poor credit histories -- with other creditors -- even if the consumer have made regular, timely payments with that issuer”.

My advice is to watch your usage of credit carefully, always pay more than than the minimum monthly due, and be certain to read the mulct black and white on any credit card offers or changes to your existent accounts.

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