Credit Cards: Why You Should Pay More Than The Minimum

Credit cards have fast become an almost essential part of our everyday lives offering convenience and a simply way to have funds at hand. Although managed incorrectly debt can quickly build up. Managing the debt can be one of the keys to success.

Of course, it's easy to advise against getting into debt with your card, but that advice is possibly little help for people who have already built up a high balance. If you're wise, that balance has not become too much of a problem, but is only making the minimum monthly repayment required enough?

When you receive your monthly statement, the minimum amount you have to pay will be shown, and many people choose to have this amount repaid automatically through their banks. This makes it easy to keep your account up to date, and gives the perception that you're keeping on top of your card balance.

The problem lies in the size of the repayment you're making. In the early days of plastic, the minimum repayment level was generally around 5% of the balance, although interestingly over the years these minimums have moved downwards with 2.5% to 3% in some cases being the normal.

Why is this a problem? Surely a lower repayment amount is attractive, as your credit will cost you less each month, putting less pressure on your budget? This is true to an extent, but the problem lies in the long term. To get an idea of how bad an idea only paying the minimum is, we need to look a bit more closely at your credit card statement.

As well as showing the familiar annual interest rate, or APR, your card statement will also show the monthly rate of interest charged on your balance. A typical card might show a rate of around 1.7% a month. In simple terms, this means that each month you will be charged 1.7% of your balance in interest. Compare this to a 2% repayment, and you'll see that over three quarters of everything you pay is swallowed up in interest charges, leaving your original debt virtually untouched.

This situation is bad enough, but it gets worse when you consider that the interest rates charged on other ways of using your cards such as cash withdrawal can be much higher. Monthly rates for withdrawing cash, for example, can be nearly as high as the minimum repayment percentage. If you withdraw a significant amount of cash within a month, it's quite possible that the whole of your repayment can go towards interest, with your debt level not reduced at all.

So even from this quick look at repayment levels, it's easy to see that by only making the minimum payment required on your statement, it could be prolonging the life of the debt by many years and vastly increasing the amount of interest to be paid. Although this could be avoidable.

One way to avoid this is to set up automatic payment of the minimum, then at the end of the month make an extra payment of as much as you can afford without borrowing from another source. Even if you can't afford to pay a large amount, every little helps especially as this will count towards reducing your overall balance. Remember, everyones circumstances are different so you may need to seek professional advice for your particular needs or situation.

Originally submitted by: Simone Butler