Credit cards are simple, right? You charge stuff and pay it off –
what’s so complicated about that?
Besides the fact that you can quickly charge more than you could easily
repay, credit card companies also charge interest and fees (the average late
fee is now $34).
Here’s a good example of how interest works. Suppose you’ve charged a total of $2,000 and then
stop making new charges. If your card
has a typical interest of 19% and a typical minimum repayment policy of 2% of your
balance per month, it will take you more than 22 years to pay off the card and the total
cost will be $7,000 – if you make just the minimum payment.
How is that possible? Even
though you pay off 2% per month, the amount you owe grows every day because of
interest – your 2% mainly pays the interest and a fraction of the original
$2,000.
If it’s not possible to pay off your entire balance each month, pay as
much as you can. Most debt counselors
recommend paying at least twice the minimum payment. That way you will pay off part of the debt,
not just the interest.
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