We’ve written about Credit Cards before (that blog post here), the good and the bad aspects. Now we’re going to delve a bit deeper into how credit card debt works.
What is the cost of your credit card debt if you only pay the minimum repayments?
Spoiler: it’s a lot. A big fat chunk of money that goes straight to the bank!
Your credit card probably has an interest rate of around 18% to 20%. The minimum payment is probably around 2% to 5% of the balance each month. A small minimum payment can seem like a good thing, it is easier to make the minimum payments and to prevent you from defaulting and getting further late payment penalties. The reality is that it means you will pay much more interest in the long run if you just stick to the minimum repayments.
Let’s use the example from Money Hub:
An Example – the $1,000 credit card bill
- If you have a $1,000 credit card bill with a minimum payment of 2%, and you pay the minimum, you’ll pay $20 on the day the card balance is due.
- If your credit card has an interest rate of 20%, you will incur around $16 of interest (20% X $980)/12 months. Your next bill will be $996 ($980 current balance + $16 interest).
- The next month, your minimum payment will (mostly) go towards interest charges and not the $996 balance you owe. Disturbingly, it will take 16 years to repay the $1,000 – and you’ll pay over $2,000 in interest costs on top of the original bill.
- Minimum payments can trap you into debt unless you increase the amount you repay.
Ouch! That is pretty scary isn’t it?!
What we can see here is that the banks are definitely the winners when it comes to credit cards. However, they’re a really useful tool if you are able to pay off the balance each month!
Paying off everything owing on your credit card is clearly the best option – but the reality is that it is sometimes not an option. The more you can pay off of your balance, the less you will pay in the long run.
Sorted.org.nz have a useful calculator where you can put in your balance, the interest rate, and your repayments. It calculates how long it’ll take to pay off your bill, and how much you will end up paying over that time. Have a play, it’s good to get a sense of how just $10 or $20 a week can change the amount of interest you pay.
If you’re concerned about your credit card debt and are struggling to get back to zero you may want to look at debt consolidation options. Please get in touch. We know that these things happen, we don’t judge, and we DO want to help you get back to a place of financial security. We can help you to refinance your different debts into a single loan, to simplify your life and generally save you money and stress. Paying off one sum is the better option.
With some smart financial planning and a debt consolidation plan we can refinance your debts to ease your cash flow and save you paying high interest rates.
Let us help!