Paying off Credit Cards With Minimum Payments?

Johann Erickson Repaying credit card debt by making the minimum payments varies with each credit card company. There are a few things that can help you understand why it is so hard to get caught up paying the minimum payment.



First, you need to understand what the minimum payment is for your credit card. The minimum amount is how much you are required to pay the credit card company every month on your balance due. The rule of the thumb with the majority of credit card companies is 2 percent of the balance that you have due. So, if your average daily balance for the month is $2,000 then your minimum payment for that particular month would be $40. That does not seem too bad. But, you also need to know that you are charged interest on the balance due also. Some credit card companies charge around 17% interest on your balance due.



Now, you must first understand how they charge the interest rate. The interest rate on your credit card is usually referred to by APR or annual percentage rate. The APR is also determined by whether you have a fixed rate or a variable rate. A fixed APR will remain the same unless the credit card company changes it in writing prior to charging the new interest rate. A variable APR changes according to changes in the national interest rate.



Okay, now you know your APR, but there are three different ways of calculating the amount charged to your credit balance, it will be charged by either the average daily balance, the previous balance or by the adjusted balance.



If you are charged interest by your average daily balance the credit card company will calculate your balance by taking the debt you had in your account every day during which the billing statement covers and average it out it over the billing period.



If you are charged interest by your previous balance the credit card company will take your balance from the previous billing period and use it for determining your interest charges.



If you are charged interest with the adjusted balance method the credit card company will subtract any payments you made from your previous balance before calculating your interest charge.



Okay, if your balance the credit card company is using to calculate your interest charges is $2000, they will take that figure and multiply the interest rate or the APR, if we say the APR is 17% then we are at $340. Then this figure is divided by the months in a year or 12 months. So, that amount would be $28.33.



Now, in the beginning, you paid the minimum payment of 2% which was $40 on $2000, and then the credit card company added the interest rate of $28.33 to your balance. So, your new balance is $1988.33. So, really you are only paying $11.67 against your balance the rest goes for paying for the interest. So, paying back your debt of $2000, at this rate will take you 172 months, or a little over 14 years.



As you see, if you only make the minimum payment each month you will be in debt for quite awhile according to what your debt is. It would be wise to pay extra each month to ensure that your balance does go down instead of staying close to the same after they had the interest. Try to calculate and add into your budget the interest rate and pay that along with your minimum payment amount if you really want to see a decrease in your balance due.



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About the Author

Johann Erickson is a contributing writer for sites such as Helpful Home Ideas. Please include an active link to our site if you'd like to reprint this article.