Training your credit card
Does your credit card behave like an untrained dog?
 | Is your card chasing after shopping opportunities, chewing up your savings with interest charges and making a mess of your financial plans? |
Like dogs, credit cards must be trained to become enjoyable companions, otherwise they can turn into uncontrollable beasts.
The most dangerous sign of an untrained credit card is making only 'minimum repayments'. See how minimum payments behave and how $1000 turns into an 11 year loan.
Use our credit card calculator to check how long it may take you to pay off your credit card if you only pay the 'minumum payment'.
Lots more tips on choosing and owning a credit card
How minimum repayments behave
Your card issuer will require you to make a minimum repayment each month. This amount is generally only a fraction of your outstanding balance, often as low as 2.5% or $25 for every $1,000 owed.
Assume you don't add any more debts to your card and you have a typical credit card:
- minimum repayments of 2.5% or $10 (whichever is the more).
- interest charged from the date of purchase (unless you pay it all off each month)
- interest at 16% per year.
How $1,000 turns into an 11 year loan
Suppose you spend $1,000, and make minimum repayments. You now have a debt on which you must pay interest. Of your first 2.5% minimum payment,
- about $13 pays interest and
- just $12 comes off the debt.
By just paying the minimum balance, you will take more than 11 years to pay off that $1,000 debt. In that time, you will pay about $860 in interest.
How $10,000 turns into a 27 year loan
Imagine now that you spend $10,000, and make only minimum repayments. Unfortunately as the debt gets bigger, minimum payments do an even worse job of getting rid of your debt. Of your first 2.5% minimum payment,
- about $133 dollars pays interest
- just $115 comes off the debt.
Minimum repayments now take more than 27 years to pay off your debt, costing you about $11,000 in interest.
What training is needed
Your credit card probably charges the highest rate of interest of any of your loans. If that's true for you, then paying off your card may need to be your number one priority. Ideally, a well trained credit card would be paid off in full each month.
If that's not realistic, especially during Christmas, then pay more than the minimum repayment and stick to that amount. For example, you would clear both the $1,000 and the $10,000 debt in 2 years by paying a regular $50 or $500 per month respectively.
FIDO Website: Printed 07/31/2010
