Credit cards are a great financing instrument because they allow you to get extra liquidity at specific times, such as higher account expenses, which is preferable to reimburse in monthly installments to avoid unbalancing the domestic economy. However, misuse of these plastics can cause indebtedness for several years. From the financial comparator MakeACash clarify what are the consequences of not knowing how to use credit cards correctly and how to avoid unnecessary over-indebtedness.
The minimum payment of credit cards
When hiring credit cards, they come with the minimum default payment method and although they clearly indicate in the contract itself what the default payment will be, not everyone takes it into account and starts using their credit cards without adapting them to a reimbursement system that suits your profile as consumers.
The default minimum payment of credit cards allows you to pay a very low percentage of the capital used. This amount varies according to the entity, although it usually has a minimum of 20 dollars or 2% of the credit money used. This means that, if a single expenditure of 1,000 dollars is made with a 21% card, it would take 7 years to reimburse the capital with fees of almost 23 dollars and, only for interest, 916 dollars would be paid. That is, although a priori paying a monthly fee of 20 dollars can be very comfortable, in the end it will end up paying almost double the amount used on credit. All this without counting other purchases made with the card after those seven years, which would extend the debt and increase the interest generated.
In addition, by using the French amortization system – for which at the beginning a higher percentage in interest is paid than in capital – the money arranged will take longer to be repaid than interest. In this way, if after 3 years it is decided to make an early repayment, 737 dollars of the remaining capital must be paid.
How to pay the minimum interest with a credit card
To avoid paying more interest on the account and thus not extending the debts more than necessary, before using the credit card you must choose the payment method that best suits the expense for which the money will be used.
If it is decided to pay the capital at the beginning of the following month, it must be made in a single installment consisting of all the money used the previous month, but no entity will charge interest for this method of reimbursement. To return it in monthly installments, you have different options or choosing a percentage of the capital owed, so the monthly payment will change according to what was spent that month plus what is due from previous months, or a fixed fee that will not change regardless of the amount due each month.
The shorter the repayment term, the less interest will be generated for the amount due. With the previous example, the purchase of 1,000 dollars at 21%, using a shorter term – 12 months, – the monthly payment would amount to 93 dollars, but the total interest would only be 117 dollars in total, almost 800 dollars less than returning it with the minimum payment. If the purchase has already been made and the form of reimbursement is that of the minimum payment, changing it is as easy as calling the entity’s customer service number or accessing it through online banking.