How Minimum Payments Are A Scam!
I have a very good friend of mine who uses his credit card to pay for everything. Literally EVERYTHING! Each month he makes the minimum payment, and only the minimum payment. He doesn’t seem to understand that minimum payments hurt him because minimum payments are a scam.
How? Isn’t a scam something that you pay for but receive nothing in return? Minimum payments are exactly that, you use the card to buy what you want or need. You then have a balance, with a recommend minimum” payment. The minimum payment is “recommended” because it gives the credit card company the highest return on investment. It’s large enough to make you think it’s doing something, yet smallest enough to hardly cover the interest — even not at all.
Credit Card companies are very smart, they have figured out how to milk people for as much as they possibly can. The average person is like my good buddy, the mindset is I can afford the payments so I can afford (insert cool toy here).
As I said before the minimum payment will hardly pay off any principle on a debt. Here are some excerpts I got from a fantastic explanation of how minimum payments are a scam. But to get the full explanation make sure to give it a look.
Video About Credit Card Minimum Payments
Also check out this highly interesting infographic!
In fact, you probably don’t know that minimum payments are strategically calculated to always be about 2% of your total balance. Why two percent? Because that’s the amount that is most likely to maximize profits (i.e. your interest payments) to the company loaning you the money.
You might think that paying 2% of your balance each month would result in paying 24% off in a year (2% x 12 months = 24%). However, since the 2% amount is calculated on a monthly basis and since interest is added to your balance every month, your minimum payments won’t ever pay off 24% of your balance in a single year.
It gets worse..
Let’s use an example to show why your balance can stay the same (or perhaps even grow) while you pay all those minimum payments: If you have a credit card with an interest rate of 18%, which is pretty common, and a balance of say, $10,000, your minimum payment would be $200 and your interest for that month would be about $150. So while you think you’re paying off $200 of your debt, you’re really only paying $50.
Multiply that by twelve months, and you’ll pay about $1800 of interest while only making a dent of $600 in your balance.
What’s even worse is that if you have an extremely high interest rate — of 24% or more — then paying your minimum payments will actually make you fall deeper in debt each month.
They also take advantage of human psychology, In fact there was a study done to examine it.
A random sample of 481 Americans saw a mock credit-card statement showing a balance of $1,937, and an annual percentage rate of 14%. Some people saw no further information, while others were informed that a minimum payment of 2% of the balance was mandatory.
What they found is that people who did not see any minimum payment number desired to pay a higher amount of their balance — significantly more than 2% — whereas people who were shown the minimum payment number were inclined to pay closer to 2% (meaning they’d be in debt longer).
How to fix this
Make sure you put as much as you can towards your debt, anything over the minimum payment helps. A dollar over helps because any amount over the minimum payment goes right to principle. If you can, ditch the cards! If you are confident to be totally responsible then use them ONLY for the rewards! The rewards are great, but they are meaningless if you are getting killed on interest. Remember credit card companies are very smart, the rewards they give you are only to keep you hooked so you get more in debt. Make sure to pay them off in full every month if you want to profit with the rewards.
Even though Minimum Payments Are A Scam,you can flip the table soon them. For instance I use a credit card that offers me 1% cash back on everything and 5% back on groceries and gas (up to $250/month) Last month I made 102.98 in cash back, paid off the balance in full. I got paid to buy stuff I was going to buy anyway. If you can game the system you can profit, but for most people the rewards don’t do a darn thing.
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