| Once upon a time, in a land far, far, away, most people | | | | currently owe $10,000 on your card, at an interest rate |
| used credit cards very sparingly. Most of the time, they | | | | of 18%, and you are required to pay 3% of your |
| paid their entire balances off every month. When they | | | | balance each month. The following table summarizes |
| were used for a large purchase, it was done sparingly, | | | | your payments and outstanding balance for the first |
| and with great forethought, with a solid plan for paying | | | | six months: |
| it off as soon as possible. | | | | Month: 1; Payment: $300.00; Interest: $150.00; Principal: |
| Nowadays, in the real world, credit card use has | | | | $150.00; Balance: $9850.00 |
| become commonplace. You've probably seen the | | | | Month: 2; Payment: $295.50; Interest: $147.75; Principal: |
| commercial: long lines of people are moving smoothly | | | | $147.75; Balance: $9702.25 |
| and quickly through the checkout, paying for their | | | | Month: 3; Payment: $291.07; Interest: $145.53; Principal: |
| purchases, until the old-fashioned dude comes through | | | | $145.54; Balance: $9556.71 |
| and tries to use cash. Everything comes to a | | | | Month: 4; Payment: $286.70; Interest: $143.35; Principal: |
| screeching halt while the cashier has to stop and deal | | | | $143.35; Balance: $9413.36 |
| with counting money and making change. | | | | Month: 5; Payment: $282.40; Interest: $141.20; Principal: |
| The problem with how credit cards are used today is | | | | $141.20; Balance: $9272.16 |
| that plastic money no longer feels like the real thing. | | | | Month: 6; Payment: $278.16; Interest: $139.08; Principal: |
| The availability of easy credit has trapped millions of | | | | $139.08; Balance: $9133.08 |
| Americans in a place where they have to use their | | | | So now, the insidious nature of minimum payments |
| credit cards to pay for the basic necessities of living -- | | | | becomes a bit clearer. At the beginning of this |
| food, gasoline, utilities -- and their outstanding balances | | | | scenario, your 3% minimum payment equals $300. |
| grow each and every month, with no final payment in | | | | However, as your remaining balance decreases, so |
| sight. | | | | does your required minimum payment! Therefore, |
| So, how do we exit the credit card merry-go-round, | | | | carrying this calculation to its conclusion, if you make |
| with its high interest rates, late fees, and over-limit | | | | only the required minimum payment each month, it will |
| charges, once and for all? There's only one way, and it | | | | take you more than 20 years to completely pay off |
| takes perseverance and commitment: | | | | your balance. And during this time, you will have paid a |
| Pay more than the minimum amount due, each and | | | | total of almost $20,000 ($19,698.17 to be exact)! |
| every month. | | | | Now, let's calculate your payment a bit differently. Let's |
| Shocking as that may sound, stay with me for a bit | | | | say that you can actually afford to continue to pay |
| and it will become more clear. You see, it's in the best | | | | $300 each month on this credit card (instead of the |
| interest of the credit card company for you to never | | | | decreasing percentage required by the credit card |
| pay off your debt. Let me say that again... credit card | | | | company). If you do this faithfully each month, you will |
| companies don't want you to pay off your card. It's not | | | | now be able to completely pay off your balance in a |
| that they want you to stop paying altogether (in fact, | | | | bit less than 4 years (47 months), and spend only |
| they get a little cranky if you do that -- just try it | | | | $3,967.21 in interest charges. And just think... if you |
| sometime and see). But they are thrilled if you pay the | | | | could possibly swing $350 each month, these figures |
| absolute minimum amount due each month, just prior to | | | | fall to 38 months and $3,156.02 in interest! |
| the due date -- or even a bit after so they can collect | | | | By now it's hopefully become obvious to you why |
| that outrageous late fee. | | | | your credit card company would prefer to have you |
| If you take a bit of time to decipher the terms of your | | | | continue to pay only the minimum amount due on a |
| credit card and do some math, you will see why your | | | | large balance each month. And why it is in your best |
| credit card company is so happy for you to just pay | | | | interest to do exactly the opposite! |
| the minimum amount each month. Assume that you | | | | |