Generosity or Genius?

Minimum payments are a great way for your credit card company to make money. The longer it takes you to pay them back, the more they can charge you in interest. For perspective, sometimes a minimum payment only covers the interest charge and will probably scrape very minimal off the principal balance.

There are also some sneaky tactics they use to get you to pay interest. One of my favorite (if you can use it correctly) is deferred interest, 0% unless paid in full before ‘x’ months. This can be a great way to get 0% interest, but the catch being if not paid in full they can slap the interest on the last month. It’s also retroactive meaning they add everything since the beginning of the loan term which can result in a pretty hefty charge. They make it difficult by not telling you how much you need to pay every month to actually clear the balance. For example if the loan is $2,000 and the limit is 12 months, they’ll make the minimum payment only $100. In reality to clear this loan in 12 months you’ll have to pay about $167 a month to to avoid interest. So do your research when taking this type of loan, it’s in YOUR interest to pay it off sooner not theirs since their job is to make money.

How’s It Calculated?

APRs% (Annual Percentage Rates) are calculated yearly, meaning that interest on balances will be charged yearly. To calculate the monthly interest charge you can divide by 12. Some creditors charge daily interest. In order to calculate this you divide by 365. For example, you have a balance of $5,000 and an APR of 25.5%. $5,000 x 0.255 = $1,275. Your yearly charge will be $1,275 now divide by 365 and this loan is costing you $3.49 a day to keep.

Now keep in mind with the example above if you only pay about $200 a month. You’ll be raking in $104 in interest the first month, meaning your principal balance will only go down $96. This is also assuming you don’t make any new purchases.

Discover makes a good calculator if you wanted to check out your individual situation. You can even check out what would happen if you increase or lower your monthly payment. In this example it will take you about 3 years to pay off this loan, and will cost you 40% more than the original principal. Paying a total of $7,019.

Shopping for APRs

Looking at your options is a great way if you can’t afford to pay off the loan or balance on time. You have the right to shop around, and creditors will try to lower their interest rates for you especially if you’re reliable and have a good credit score. Some credit cards will even lower their APRs for you, all you have to do is just call them and ask.

Not so generous after all

Now that you see the truth behind minimum payments, you should try to pay more than the minimum to get out of debt. If you can’t budget more than that, paying the minimum payment still puts you in good terms with your creditor. This means that you won’t get punished negatively in any way (besides paying more to them) and having a good payment history is good for your credit score. Keep an eye out for APRs and if you really need to hold balances go for the lower ones. The math never lies.

Thank you for reading and I’ll see you next Sunday,
– Pablo