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Beware Of Falling Minimum Payments
By: James Dimmitt
If you opened a credit card statement recently and were pleasantly surprised to
find that your minimum payment due was lowered, don’t be so quick to “jump for
joy”. What may appear as a small boost to your monthly budget is actually the
rock that can weigh you down in debt for a lifetime.
More and more credit card companies are moving to requiring a minimum payment of
2% of your total outstanding balance. Consumer Action, a consumer advocacy group
out of San Francisco, found that the number of card companies with a 2% minimum
payment reached 53%, up from 43% just a year ago.
Some creditors have even gone so far as to call this a “consumer friendly” move
claiming it will assist consumers faced with today’s economic 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 money in interest payments.
For example, let’s say you have a credit card debt of $2500.00 @18% annual
percentage rate (APR). Your monthly minimum payment based on a 2.5% pay 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 know - it will take you 20 YEARS to pay off
your $2500.00 balance paying the minimum monthly due. And you will have paid the
credit card company $3,365.51 in interest!
Now lets look at the same example using the rate of 2% minimum monthly payment.
Your monthly payment drops to just $50.00 a month. You might be tempted to think
“wow, I’ve got an extra $12.50 a month to play with, yippeee!”. Not so fast!
That lower minimum payment now means it will take you 34.5 YEARS 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 third of card issuers said they will raise
existing cardholders' rates because of poor credit histories -- with other
creditors -- even if the consumer has made regular, timely payments with that
issuer”.
My advice is to watch your use of credit carefully, always pay more than the
minimum monthly due, and be sure to read the fine print on any credit card
offers or changes to your existing accounts.
About the Author:
© 2005, http://www.yourfreecreditreportnow.com Author: James H. Dimmitt James is
editor of “To Your Credit” a FREE weekly newsletter focusing on managing your personal finances and credit. Subscribe and get a FREE copy of your credit
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