Paying Down Debt
Have you ever really looked at your credit card bill? Carrying a balance, even a small one, can add up over time when you consider the interest. Sometimes, statements will include your balance, the minimum payment due, the interest/intersest rate, and the amount of time it will take to pay off the debt if you only pay the minimum - granted, you don't make any new purchases. It can be a little scary and even more reason to pay it off sooner than later.
Take a look at the example below:
It’s a good idea to pay attention to your bill - in this case, the creditor is very transparent. Here’s a card with a relatively small balance, a high-interest rate (25.24% ), and a disclaimer. Highlighted in green, it states, “If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.” Given the facts - it would be in my best interest to pay more than the minimum - even if I can’t pay it all. Why? Because paying just the minimum $28 will take me 10 months and cost me in interest. If I were to pay more, maybe double the minimum, it would take less time, and I’d end up paying less in interest - that’s a win! Now, the extra amount paid in interest in this example is $26.24 ($260 - $233.76), which may not seem like much. But think about this, if you were to pay the balance in full, instead of wasting $26.24 on interest, you could pay on another debt or have that money to put into savings.
Pay More if You Can
The point is to be careful with minimum payments, especially on high debts. Paying small amounts over long periods can be rather costly - ask anyone with a 30-year mortgage (but that’s a topic for another day). The minimum payment due is just the minimum you have to pay by a certain date to avoid a late charge, but that doesn’t mean it’s the only amount you’re permitted to pay. The creditor doesn’t mind if you take your time because that’s interest earned for the company - more in their pockets, less in yours. At the end of the day, you may be paying much more than something is even worth if you allow interest payments to rule.
Sometimes with new cards, you may have 0% interest for a set amount of time - this would be the only time when the minimum payment could be okay, but only if you plan to pay it off during the zero-interest period. Otherwise, beware!
Managing Money Like a Boss means paying attention to the details. If you’re only paying the minimum due on an account balance, you can be losing dollars that can instead be working for you. Put as much towards debt as you can, as quickly as you can, and knock it out, Boss!