Tuesday, May 20, 2008

When Paying More Pays Off

Here's a case where paying more than what is asked is in your best interest.

Take a look at your credit card bill. There's a spot that says minimum payment due. That's all their asking you to pay. And compared to your total bill it's pretty small. IGNORE THAT.

Instead pay as much as you can--hopefully the entire balance. The minimum payment covers the interest owed and only a small portion of the balance. When you pay just the minimum balance you keep racking up future interest. That's how credit card companies earn money and how you get deeper and deeper in debt.

Paying in full will save you from debt and interest. But if you can't afford to pay the entire bill then just paying more than the minimum would save you a bundle.

photo by redjar

Parting with just one more $20 can keep you afloat.

Look at this example:

If I charged $1,000 on a 12% interest card.

My minimum would be around $40.

At that rate I would pay $289.07 interest and it would take me 74 months to pay it off.

If I payed a little more, say $20 more (that's $60 to save you from the math).

I would pay $183.24 in interest and it would take 53 months to pay off.

I'd save $105.83 and 21 months of debt. Not bad.

To calculate your own payments use this calculator from Bankrate.com.

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