One of the biggest myths prevailing in credit card
usage is that minimum monthly payments are designed to help
consumers get rid of their balance in a timely fashion. However, as
we are about to demonstrate for you below, such a statement cannot
be farther away from the truth. In fact, making only the minimum
payments on your credit card bill can cause your interest charges
to skyrocket, inflating the total cost of your credit card debt.
According to ValuePenguin's calculation, making only the minimum
payment requirement every month on a credit card balance of
S$10,000 can take you 21 years to pay down your entire balance.
We based our calculation on two things. First,
the average APR of credit cards is around 25%.
Then, to obtain the time it takes to pay off a balance of S$10,000,
we modeled credit card debt payback by using a method that most
banks use to set their monthly minimum card payment: 3% of remaining balance or S$50, whichever is
greater. Each month, a consumer reduces the balance by the minimum
payment amount, which is offset by some increase in balance from
interest charges. Because your payments are based on the percentage
of your outstanding balance, as your debt shrinks so do your
payments and interest charges.
Based on this methodology, we calculated that it takes
about 21 years for a Singaporean to pay off his credit card debt of
S$10,000 if he only pays the monthly minimum payment required. Over
this quarter of a century, the consumer would pay approximately
S$20,000 in interest - all of this, under the optimistic assumption
that no new charges are put on the account. While it is possible a
consumer may be able to afford paying significantly more towards
their bill, minimum payments extend the total time it takes to
repay the debt.
Though it may seem unbelievable at first glance,these
numbers represent just how much of a financial trap minimum credit
card payments are. This problematic financial situation can be
avoided in several ways.
First, it's never a good idea to carry a balance on
your credit card - ever. If possible, you should
always avoid putting any charges on your card that cannot be paid
off in full by the end of the month. Letting this rule slip, little
by little, can quickly cause your debt to snowball into an out of
control beast.
Secondly, it's generally a good idea to create a fixed
monthly payment schedule for your credit card bill. Ideally, you
should be putting away as much as you can afford towards your
credit card bill: the goal is always to pay down your balance
entirely as quickly as possible. Merely putting a dent in your
total outstanding balance doesn't mean you should relax and pay
less. If the average consumer we examined were to pay S$400 every
month, the time needed to pay down that debt would be cut down to 3
years, reducing their total interest paid by close to $3,848.
Lastly, if you have too much balance for you to pay
back soon, you may want to consider getting either a balance transfer or a debt consolidation plan. These instruments can help
you avoid high credit card interest for a few months or to a few
years. Typically, balance transfer loans are ideal for smaller
amounts that take 12 months or less to payback, while debt
consolidation loans are great for bigger balances that take a few
years to repay. Using either of the instruments can help you save
thousands of dollars in cost, and help you repay your obligations
more quickly.