The Following example shows how making a minimum payment on your credit cards can cost you
more than you think!
Assume that Ms. Jones has an account with a major credit card issuer (account balance of
$2,500.00). Her APR (Annual Percentage Rate) is 19.9%. Ms. Jones has decided to close
this account and pay it off. The interest charged for this month is figured as follows:
19.9% divided by 12(months) = 1.66% (per month)
$2,500.00 x 1.66% = $41.50
Assume also that the minimum required payment on this account is 2% of the outstanding
balance. The payment on this month's billing would be $50.00. The minimum payment can
never be less than $20.
$2,500.00 @ 2% (.02) = $50.00
Beginning Balance $2,500.00
Payment - $50.00
= Subtotal of $2,450.00
Plus Interest + $41.50
New Balance $2,491.50
BALANCE REDUCTION: $8.50
Ms. Jones' fifty dollar payment reduced her balance by only $8.50!
By continuing a payment plan like this one, Ms. Jones' major credit card account can take
up to 31 years to pay in full. Also, by the time that it is paid in full, the amount of
interest charged is at least double. On this account, the interest would have added up to
be $8,476.00. This is in addition to having to pay the original $2,500 balance.
When you think about what you charged on this account, is it worth paying on it for 31
years?
If Ms. Jones can send $10 more than her minimum payment each month, she will
drastically cut the amount of time it takes to pay this balance off. This payment plan
will only take her 14 years to pay off this account. The amount of interest she will end
up paying will now only be $3,348.
