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Beware of Falling Minimum Payments
If you opened a credit card statement recently and were
pleasantly surprised to find that your minimum payment due was
lowered, don't be so quick to "jump for joy". What may appear as
a small boost to your monthly budget is actually the rock that
can weigh you down in debt for a lifetime.
More and more credit card companies are moving to requiring a
minimum payment of 2% of your total outstanding balance. Consumer
Action, a consumer advocacy group out of San Francisco, found
that the number of card companies with a 2% minimum payment
reached 53%, up from 43% just a year ago.
Some creditors have even gone so far as to call this a
"consumer friendly" move claiming it will assist consumers faced
with today's economic woes. In reality, a lower minimum payment
causes you to take longer to pay off your debt to the creditor
while winding up paying them more money in interest payments.
For example, let's say you have a credit card debt of $2500.00
@18% annual percentage rate (APR). Your monthly minimum payment
based on a 2.5% pay back rate would be $62.50 per month. Oh and
by the way, here's what the credit card company really doesn't
want you to know - it will take you 20 YEARS to pay off your
$2500.00 balance paying the minimum monthly due. And you will
have paid the credit card company $3,365.51 in interest!
Now lets look at the same example using the rate of 2% minimum
monthly payment. Your monthly payment drops to just $50.00 a
month. You might be tempted to think "wow, I've got an extra
$12.50 a month to play with, yippeee!". Not so fast! That lower
minimum payment now means it will take you 34.5 YEARS to pay off
your balance of $2500.00 and you'll wind up paying $6,430.93 in
interest!
Consumer Action also reports that many credit card companies
are imposing higher late payment fees and "more than a third of
card issuers said they will raise existing cardholders' rates
because of poor credit histories -- with other creditors -- even
if the consumer has made regular, timely payments with that
issuer".
My advice is to watch your use of credit carefully, always pay
more than the minimum monthly due, and be sure to read the fine
print on any credit card offers or changes to your existing
accounts.
© 2004, www.yourfreecreditreportnow.com
Author: James H. Dimmitt
James is editor of "TO YOUR CREDIT", a weekly free newsletter.
Subscribe to the newsletter by visiting http://www.yourfreecreditreportnow.com.
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