Credit cards are essential today for various transactions, such as shopping on the Internet, booking a hotel room or renting a car. However, they are also one of the main causes of indebtedness .
For the new users of the credit card the risks are significant, the ease of settlement of the amount in debt appears as an incentive to the consumption and the unconcern for accumulating it.
This facility is known for the minimum payment that generally all credit cards have, albeit in different proportions. It is possible to buy today a credit card worth 2,000 euros and pay 5% of the amount in debt monthly, that is, approximately 100 euros per month.
The minimum payment is comfortable …
Given these facilities, most new users and even more mature users feel comfortable with purchases made with the credit card, because buying a good LCD for 600 euros, could represent only 30 euros per month if opt for the minimum payment.
It is good to keep in mind that most credit cards allow the minimum payment according to a defined percentage, however, they may also limit the minimum amount to pay, such as a minimum payment of 5% with a minimum of 25 euros.
The minimum payment is the main source of income for credit card providers, as it allows high financial margins resulting from interest rates on credit cards, where the limit is only the maximum limits defined by the Bank of Portugal for each quarter.
What is the Real Cost of Credit Card Debts?
Take for example a debt on the credit card of 2,000 euros with minimum payment of 5% and with a minimum mandatory amount of 15 euros. If the card’s interest rate is 18% per annum then the interest weight will be between 300 and 360 euros per year.
A simple way to determine how much the minimum credit card payment costs is to complete the following two steps:
- Divide the interest rate by the number of months year: 18% / 12 = 1.5% per month;
- Multiply the monthly rate by the amount in debt: 3,000 * 1,5% = 30 euros of interest month;
By choosing the minimum payment, 30 euros correspond to interest, and the remaining 70 euros will be amortized to the principal amount in debt. The following month will still have a debt 1,930 euros (2,000 – 70) to settle, which applying the same procedures will have a minimum payment of 96.50 euros of which 28.95 euros are interest and the remaining capital to be amortized for the following month.
If you decide to continue making the minimum payment of the credit card during the following months then you must have more than 700 euros of interest that you will have to pay for more than 72 months.
The Best Recommendation for Using Your Credit Card
As you can see, opt for installment payments regardless of whether or not you choose the minimum payment, the costs generated are significant because credit card interest rates are high compared to other credit solutions, such as personal credit.
In these terms, it is undoubtedly the best recommendation for using the credit card to pay 100% of the debt, always enjoying the free credit period and avoiding the payment of interest without having to mess with your emergency fund.
If you do not pay your credit at 100% you may find in credit negotiation with your bank a way to reduce your monthly charges. Never forget that credit cards are the most profitable source of income for all banks. If you stop to think, it’s not by chance that some institutions offer you mobile phones, coffee machines or tabblets to ensure you have new customers!