Credit Card Debt

Why you need to pay more than the minimum credit card debt payment.

Credit Card Debt Information

What Is A Credit Card

A credit card is something that you use to make cashless purchases. When you charge it to your card that means you can take home the items you purchased with a promise that you will pay for it in the future. That refers to a short term future because credit card companies send monthly billings that includes the purchased amount, interest rate and other fees and charges.

 

Unsecured Debt

A debt has several types and one of them is an unsecured debt. It usually involves a risky short term loan (unsecured loan) that does not require any collateral. The high risk involved means the lender is not guaranteed complete payment on time – or at least they do not hold anything that will guarantee that the borrower of the money will pay them immediately. To protect themselves, lenders do one thing to make sure they are paid back: they charge very high interest rates.

A perfect example of this high-interest debt is credit card debts. They have high interest rates which you’re required to pay for every month on top of the principal amount that you borrowed through spending.

Credit card debt is also a revolving debt because it is an open ended loan. There is no end to it and you keep on paying for it as long as you keep using the credit card. Also, the interest rate is dependent on the balance of the loan and how timely you make your payments. It changes a lot.

 

Understanding the Interest Rate on Credit Cards

What makes credit card debt very dangerous and financially destructive is its interest rate and the manner by which its payment requirement is systematized. You are deluded to think that you can only pay the minimum amount on your billing statement. What most people do not know is that will put you in debt for a very long time.

Credit card interest rates average to 17% – 20% of the current balance. The minimum payment requirement on the statement includes the interest rate and a very small percentage of your actual balance – usually around 1-2% only. If you keep paying for only the minimum amount, you will be paying for a very long time! And if you total the amount of interest that you have paid for, you will realize how much you have made credit card companies rich!

The average American card holder used to only pay for the minimum payment while continuously making purchases through these plastic cards. That is probably why it is the third highest debt that riddles the average American. Studies show alarming statistics of the average household being more than $15,000 in debt due to credit card purchases.

Paying more than the minimum payment will actually benefit you in the long run.

$10 more a month saves nearly $1000

* computations based on a sample provided by Investopedia.

Subject A

Total Debt Amount
$2,000

Interest Rate (20%)
$33.33

Minimum Payment (3%)
$60

Paid Amount
$60

Principal Amount Paid
$26.67

Remaining Balance
$1,973.33

Total Amount Paid

$4,240

Subject  B

Total Debt Amount
$2,000

Interest Rate (20%)
$33.33

Minimum Payment (3%)
$60

Paid Amount
$70

Principal Amount Paid
$36.67

Remaining Balance
$1,963.33

Total Amount Paid

$3,276

 By increasing the monthly payments, Subject B shortens the payment period for more than (1/2) half and saves almost $1,000.

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