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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
Given the power of compounding interest and the damage it can wreak to your finances. Why Paying the Minimum on Credit Cards Can Cause Maximum Damage By Britt Erica Tunick Anyone who has a credit card will have noticed the line at the top of each monthly statement indicating the minimum amount that can be paid toward the balance on that card without incurring a penalty fee. But make no mistake - whether you are “officially” hit with a penalty fee or not, if you pay only the minimum of your balance each month your penalty will ultimately be repaying your card lender FAR MORE than you ever spent to begin with or could possibly even imagine. Just as the magic of compounded interest can slowly multiply a small investment into significant savings, so too can it multiply the debt incurred on a credit card. With the average credit card interest rate currently hovering around the 15% mark, carrying even the most minimum balance on a card can quickly get out of hand. For example, if you choose to carry a $3,000 balance on your card, if you are actively employed that amount may not seem unrealistically high and appears quite manageable. But at a 15% interest rate, assuming you don’t add any additional debt to that amount, a $3,000 balance would increase to $3,450 after only one year and to $6,034.07 after five years. Add to that the fact that most consumers will continue adding additional debt to their balances and what seems to be a manageable balance can quickly grow out of hand. In some cases, consumers that carry too high a balance on their card, or who miss even one monthly minimum payment, could also discover a sudden jump in their interest rate - a jump often buried within the tiny legal print of the terms and obligations provided with any credit card. Given the power of compounding interest and the damage it can wreak to your finances, the best bet is to pay your credit card balances in full each month, or to make as large a payment as you possibly can. Similarly, if you can’t pay off your balance in full, the next best thing you can do is to avoid adding even another dollar to that balance by stopping any additional charges and paying cash for any purchases until the balance can be eliminated entirely. However enticing an item on sale may be, and however harmless it may seem to add that one item to an ongoing credit card balance, in the end you could wind up paying ten times the amount that the same item would cost at full price. |
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