Understanding credit cards
A credit card is a loan. And like all loans, it is important you understand how it works.
Like all loans, credit cards charge interest in addition to the amount of money you borrow.
But when it comes to credit cards, the rate of interest you will pay will depend on a number of factors:
- The amount of money you borrow on the credit card
- The rate of interest the credit card charges
- If you only make the monthly ‘minimum payment’ or you pay the credit card bill off in full each month (if you do, you will avoid paying interest).
- Any additional charges you may be required to pay.
Curse of minimum payments
Credit cards are also referred to as a ‘revolving’ credit. This is because of the unique nature of them. Some months, credit card users may have little use of them and other months, they may use their credit card a lot.
Because of this, there is no fixed monthly repayment.
So, in order to ensure the credit card company gets paid each month, it sets a ‘minimum payment’ and this can be a fixed minimum amount if your monthly balance is really low, or a percentage of your current month’s balance if it is high.
And it is the ‘minimum payment’ feature that can really cost you a bundle of your precious income.
In some months, the amount of additional interest charged to you can be almost as much as the previous months payment you made. Sounds crazy, but it could mean than in money terms, you could end up running to stay still.
Tricks to paying a credit card off fast
If you want to avoid the trap of the minimum payment and the really high interest charges you’ll have to pay, do the following:
- Pay the full amount each month – this way will mean you avoid any interest charges for the month.
- If you cannot make the full payment – make the maximum payment you can afford.
- If you have savings earning very little, use it to pay off your credit card balance – this is a smart way to manage your month as you’ll avoid those hefty interest charges.
Remember, credit cards can be a great way to manage your money as they give you excellent visibility as to how you spend your money. But you need to manage how you pay them back. if you make the minimum payments after your bill comes in, if you can, pay the full amount, if not the full amount, pay the maximum amount. Avoid those really expensive interest charges.