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Many people seem to have trouble understanding why they should not just make the minimum payment on their credit card each month. They just cannot see that they are just throwing money out the window each month and prolonging their payments for a very long time. Of course, they are reducing their monthly cash flow, but at what cost? A couple of simple calculations should clearly illustrate my point. You can find many payment calculators online to evaluate your personal situation similar to the following example.
Let’s say that you make a $2000.00 purchase on your credit card. Let’s also assume that your minimum payment is 1.5% of your balance, or in this case beginning at $30.00 per month. By paying the minimum each month, it would take 239 months to pay off the original debt and you would pay a whopping $1,594.28 in finance charges.
By contrast, if you just set your payment at a fixed $30.00 it would reduce the number of payments to 93 and the interest charges would amount to $782.99.
If you were able to pay $60.00 a month you would pay off your debt in just 39 months and only pay $310.13 in interest.
If you can only make a minimum payment on your credit card it would probably be wise to get a home equity loan in order to claim the interest on the loan at the end of the year.
Those numbers are amazing. Do you realize that 239 months is one month short of 20 years?! There is a difference in interest of $1284.15 between the minimum payment approach and the $60 per month and it pays off in just a little over three years. I’m guessing that maybe the minimum payment schedule is not looking so appealing any more. Making minimum payments to help with unusual expenses is ok, but don’t get caught up in making minimum payments for too long as you can see what it will cost you in the long run.
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