Credit Cards offer both the convenience of not carrying cash and access to funds you currently do not have. You just need to borrow funds from the credit card company until your payment date. Typically, they will even give you cash without charging any interest for an average of 21 days (about 3 weeks). That is, no interest if you pay the total balance due by the required total payment date!
Did you know? If you are not able to pay off your total balance, you will be paying way more!
- Do not be fooled by “Minimum Payment Amount.” If you have a higher interest rate of 29.99% and they offer you a Minimum Payment amount of 2% of the balance due, you may never pay off this credit card during your lifetime! The interest they charge is higher than the $100 Minimum Payment Amount.
- This is how credit card companies determine the Minimum Payment Amount which is a trap for you to NEVER PAY OFF your Balance!
How Minimum Payments Are Calculated
A minimum payment is usually calculated based on your monthly card balance, including any fees and interest charges.
Two methods of calculating minimum payments are common:
Flat percentage
You'll pay a percentage of your total statement balance, including interest and fees, usually between 1% and 3%. Say your minimum payment is 2% of your balance, which is $5,000, you would owe a minimum payment of $100.
Percentage plus interest and fees
You might pay a smaller percentage of your statement balance, say 1%, plus the interest charges and fees accrued during that statement period. Suppose your statement balance is $5,000, and you have accrued $80 in interest charges and $40 in late fees. If your minimum is 1% of the balance plus interest and fees, you would pay $170.
Depending on how your issuer defines the minimum payment, a few different scenarios could change the math. For example, a small balance may result in owing a fixed amount, such as $25 or $35, or the full balance if you owe less than that fixed amount. The card issuer may also add any overdue payments or over-the-limit balances to your minimum payment.
Quick Math
If you make $30 a month (3% of the balance amt) to pay off $1,000 purchase on a credit card charging an interest rate of 29.99%:
- Your Total Payment: $2,165.76
- Your Total Interest Paid: $1,165.76
- Time to Payoff: 6 Years!
Credit cards are offered to Subprime Credit consumers.
The Consumer Financial Protection Bureau identifies five credit score categories in prime terms:
- Deep subprime (credit scores below 580)
- Subprime (credit scores of 580-619)
- Near-prime (credit scores of 620-659)
- Prime (credit scores of 660-719)
- Super-prime (credit scores of 720 or above)
All credit card touts “a way to build credit” but at what cost?
Typical terms offered by various credit card issues targeting Subprime consumers charge a whopping 50% to use a $500 balance credit card. To explain:
- $500 credit limit
- $99 Annual Fee
- 29.99% interest rate
If you used the $500 credit limit in the first few days after receiving the card and were not able to pay off the balance and were only able to make the minimum payment to cover the interest charges, you will be paying the following:
- $150 in interest charge
- $99 in Annual Membership Fee
- $249 total to use $500!
- Plus, any late fees, ATM fees, etc.
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