COPYRIGHTED MATERIAL
4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 S M T W T F S 1 2 3 29 30 31 JULY
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 30 25 26 27 28 29 S M T W T F S AUGUST
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 S M T W T F S 1 SEPTEMBER
24 31
IV. The Minimum Payment Trap Here’s another weird and potentially dangerous thing about credit cards: Paying off all of the charges accrued within a billing cycle is not required. It is completely optional! A borrower may make a minimum monthly payment which is the lowest amount that can be paid to avoid a late payment fee or, depending on your card terms, triggering the penalty rate. A typical minimum balance payment is 1–2% of the outstanding balance. The Effect of the Minimum Payment. While the ability to make minimum payments is convenient when funds are tight, it is also extremely costly. The effect of making minimum payments, or paying any amount less than the full balance, is that the card carries over a balance from billing cycle to billing cycle. Unpaid interest and fees accrue , which means they are added to the credit card balance . On and on, as long as a balance remains on the card, the credit card company is happily tacking unpaid interest and fees to the balance and collecting 15% interest on it! This is where compounding works against you and where a lot of people get into financial trouble. Making only minimum payments substantially prolongs the time it will take to pay off the balance. It has a sort of “two steps forward, one step back” effect. If you stop charging on the card and make only minimum payments, the balance will eventually be paid off, but if the card balance is high, it can take several years. Paying Higher Prices. If you purchase something with your credit card and do not pay the balance in full each month, you are effectively choosing to pay more for that thing in order to have it now. For example, imagine you bought a $500 cellphone with a credit card that carried an APR of 15%, the national average. If you paid only the minimum payment on your card, that phone would take 3 years and 7 months to pay off and effectively cost you $650 . Unless you are absolutely certain you can repay the charges in full by the payment due date or at least within a a couple of billing cycles, mentally add the cost of using credit to the cost of the item before you buy, so you know how much you will actually end up paying for it. Better yet, if you can’t pay off the balance within a couple of billing cycles, download a credit card pay off calculator to your mobile phone and check out the true cost of the item before buying it. Go to bankrate.com's minimum payment calculator. Assume the purchase of a variety of items, such as a new laptop or several restaurant meals. Then assume they are paid off in minimum payments. Note how much more purchases cost when they are paid over time and how long it will take to pay off the card balance. When the credit card balance is not paid off each month, the cost of the goods increases and the burden of debt can spiral out of control. PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 245
Made with FlippingBook - Online catalogs