The high cost of debt when you pay just the minimum

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The high cost of debt when you pay just the minimum
2 years ago
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Credit cards can be a blessing if you know how to handle them properly. If not, they can lead you to financial disaster. Unfortunately, a big percentage of consumers are struggling to pay their debts accumulated through the years of overspending.

There's no way you can continue spending more than what you earn because the high cost of carrying credit card debt will eventually bring you down. How much and how early you pay your credit card bills, as well as how you use your credit cards, have great effects on the finance charges that you have to pay. Treat your credit cards right and you will not have to deal with the high cost of carrying credit card debt.


If You Keep on Paying Only the Minimum
It's been the practice of many cardholders to pay only the minimum amount every month. This is not a good thing because if you carry an unpaid balance, you don't get to enjoy the grace period which is 20 to 25 days before your purchases are charged interest.

Besides, you may not realize it but you pay out much in interest when payments are made in small increments over a period of so many years. It will take a long time before you can get out of your credit card debt when you pay only the minimum because bulk of your payment goes to interest servicing and very little is applied to the principal.

Even those "skip a month" offers where you need not make any payment during holidays will not do you any good because only the penalty fees are waived during the "skip"; interest will still be accrued on your account.


How Credit Card Companies Compute Finance Charges
Credit card companies vary in their system of computing finance charges. You may have the same APR on two different cards but you will notice your bills will have very dissimilar finance charges. The difference is due to the grace period that you may or may not enjoy in either card, and the method of calculating the balance on which interest is charged.

The most common balance calculation method used by credit card companies is the average daily balance where the outstanding balances for each day within the billing cycle are added up and the sum is then divided by the number of days in the billing cycle. If your credit card excludes new purchases in the averaging process, you benefit as the finance charge will be lower. Inclusion of the new purchases increases the balance and results in bigger finance charge. Therefore, if you revolve your credit card balance, paying your bills earlier will bring down your average daily balance and lower your finance charge. Besides, when you pay your bills promptly, you avoid having to pay late fees.

The least consumer-friendly balance calculation method is the two-cycle average daily balance since it includes the average daily balances of the current billing cycle and that of the previous billing cycle. It becomes more detrimental to the cardholder if new purchases are also included as this would really push up the average balance and consequently, the finance charge.


Transaction Fees, Balance Transfer and Cash Advances
Some credit card companies charge transaction fees each time you use your credit card, so the more you use your card, the bigger transaction fees you pay.

There are also transaction fees when you transfer balances. Even if your new card offers unbelievable low APR to 0% for balance transfers, take note of the new APR after the promo period and the transaction fees you have to pay.

Don't be misled by the percentage points; compute for the dollar equivalent because that is what you will be paying your credit card debts. Then, there is the cash advance feature. Transaction fees and the APR for cash advances are usually much higher than your charged purchases.

If you can qualify for other types of loan, you are better off borrowing directly from other lenders than advancing cash from your credit card.
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