By now we all know that making only minimum payments on a credit card isnâ€™t ideal. However, do you have a true sense of how much it can set you back? The FTC has recently released an article highlighting just how detrimental the â€śminimum payments onlyâ€ť strategy can be to your finances.
The Problem with Minimum Payments
Initially, the premise of credit cards can seem pretty appealing. â€śBuy now, pay later,â€ť and in some cases you even earn rewards for your purchases. But if these purchases arenâ€™t paid off by the end of the month, the amount becomes debt. And credit card debt is one of the main obstacles to achieving financial freedom.
Thatâ€™s in large part because these cards are set up to lock you into paying for an item for months (and often years) after the initial transaction. Plus, with interest rates as high as 20% or more on some cards, buying on credit and making minimum monthly payments means that youâ€™ll be paying far more than the original price.
Whatâ€™s one surefire way to ensure that youâ€™ll be paying for years on a small initial purchase? Making only minimum payments. These are payments suggested by your credit card issuer to cover your accrued interest but almost none of your principal. These payments arenâ€™t intended by the credit card company to help you get out of debt but rather to acquire a reliable monthly stream of payments from you. The problem is, you wouldnâ€™t necessarily know that unless you read your credit card statement carefully. And thatâ€™s how the prevalence of credit card debt has become such a problem.
For direct evidence of the Â financial effect of making minimum only payments, check this calculator out and plug in your numbers. The results may shock you.
How You Can Work Your Way out of the Minimum Payment Cycle
If youâ€™re stuck in a monthly minimum payment cycle, there is hope for you to break free! By targeting one account and paying extra on that, you can speed up your repayment and pay less overall interest over time. Two methods of doing this are theÂ debt snowball and debt avalanche â€“ with the snowball focusing on the smallest balance first and the avalanche focusing on the highest interest rate first.
Not sure how you can apply any more to your payments than you already are? One way to get around this is to re-do your budget to look for areas you can reduce in frequency or cut altogether. You could also explore ideas to earn extra income. Even a small amount extra on top of your minimum payment can make a huge difference over time!
Thereâ€™s no better time than now to take control of your credit card debt and create a repayment plan that schedules above minimum payments that are keeping you in the red. Go above and beyond â€“ especially when it comes to monthly payments!
Image Credit unhindered by talent
This post was published by Claire, Content and Community for Â»Â ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download