Are you wondering why paying the minimum amount due on your credit card bill does not reduce the outstanding balance? Could you be getting into a debt trap? Read on to find out.
Plastic money has added a zing to our pockets in recent times. While this has increased our propensity to spend, it also has laid traps for people who make impulsive purchases and are careless about making payments.
Typically, credit cards charge an interest rate of 36% per annum on an average in India and 18% in the US, on the borrowed amount. The annual percentage rate (APR) determines the amount that you pay if you decide not to pay the entire outstanding balance on your credit card each month. This rate can be as high as 25 %( US) and 42 % (India) in a year for some card issuers. If you used your card to withdraw cash the rates are even higher. An amount is calculated and duly mentioned on your card statement as the ‘Minimum Amount Due’. This is the least amount that you must pay each month to continue using the card and avoid additional transaction charges. The minimum amount due is usually 2% (US) and 5% (India) of the total outstanding balance.
Consider that your credit card charges an APR of approximately 18 % (US) and your outstanding balance is USD 2000. The minimum payment you’ll have to pay would be approximately USD 40. If you pay only this amount, only USD 10 will reduce from your outstanding balance. If you continue to make minimum payments, you can settle your debt in approximately 12 years. You will also pay close to USD 2500 in finance charges! This is if you do not spend any more on the credit card! A debt trap, don’t you agree?
There is, however, a way out. If you pay USD 50 instead, you can pay off your debt in 5 years and save the interest amount worth approximately USD 11,000. This will also enable you to avoid finance charges. Therefore, it is advisable to pay more than the minimum amount due if possible, and clear as much as possible of the outstanding balance every month.
Have you been through a bad credit card-related experience? What went wrong and how did you solve the problem? Share your experience right here!
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