Credit cards get a bad reputation, and with good reason. They tend to have high interest rates, and card issuers design them in a way to maximize the chances that you’ll pay a fortune in interest.
Unfortunately, as many as 30% of Americans have fallen into the credit card trap that’s been set for them. But the good news is most people can avoid it and instead use credit cards as a helpful tool that earns rewards. The key is to know how card issuers aim to keep you in debt and make choices to avoid falling victim.
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Far too many Americans are doing just what card issuers hope
According to a recent Northwestern Mutual survey, 30% of adults in the U.S. pay the minimum amount due on their credit cards either most of the time or always. That’s a huge problem, because paying the minimum means most or all of their monthly payment only covers the interest due.
Card issuers set it up this way so that you basically stay in debt forever. When you pay only interest charges and little or nothing toward reducing your principal, your balance never declines. You just pay every month for the privilege of borrowing without making any progress toward debt freedom.
The costs of this mistake can be astronomical. Let’s say you have a $5,000 credit card balance, your card has an interest rate of 17%, and your minimum payment equals 2% of your balance or $10, whichever is less. If you pay only the minimum balance, you will be paying off your debt for 482 months. That is more than 40 years! You will also pay a total of $11,304.46 in interest — more than double the amount you actually charged on your card.
It’s easy to see why card issuers want you to do this. They’ll make a fortune. But unfortunately it will come as a huge cost to you since you’ll be stuck with your debt obligation forever. Sadly, far too many Americans think they only need to pay the minimum — or they settle for paying only what’s required because they have other pressing financial obligations.
If you don’t want to end up paying a small fortune in interest, it’s imperative that you don’t fall victim to the trap card issuers set up for you. Ideally, you should pay off your credit card balance in full every month so you never pay interest. If that’s not doable for you, try to pay more than the minimum as often as you can — even if it’s just a few dollars. Any progress you make on reducing your balance ahead of schedule can cut months or years off the time you have to pay your debt.
You may also be able to get out of debt faster by reducing your interest rate so more of your monthly money goes to principal. If you use a 0% intro APR balance transfer card, you could reduce your rate to 0% for a limited time so your entire payment would go toward bringing down your principal. This should help you become debt-free sooner.
You could also opt for a low-interest personal loan to reduce your rate. Personal loans come with fixed repayment schedules, so you’d also know exactly when you’ll become debt-free.
It may be hard to find a solution to avoid paying more than the minimum — especially if you’re strapped for cash as so many people are. But if you’re among the 30% of adults paying only what’s required, changing that habit could make a huge difference in your long-term financial security and it’s definitely worth doing as soon as you can.
View more information: https://www.fool.com/the-ascent/credit-cards/articles/30-of-americans-are-falling-victim-to-this-credit-card-trap/