Credit Cards are the cards issued by Financial Instituitions to the individuals giving them option of a mean of short term financing at the point of sales. These institutions charge interest rates which are generally higher than other consumer loans. Credit Cards are one of the most popular method of retail payments in US because of its wide spread acceptance.
Assuming, that bank will charge no other fees and on the basis of 2% minimum payment regulation, amount to be paid on $5270 will be:
Minimum Amount Due: $5270*2%= $105.40
I have an American Express Credit Card that shows that total amount due on my card is: $5199.29. An indepth view of the terms of my credit card and my previous transactions will help us understand as how banks charge interest on outstanding credit card balances:
My Statement is released by the bank on 18th of every month while the payment date is 28th of every month. The annual APR is 39%(i.e 3.25% per month) and minimum payment due is 5% of total outstanding balance. Below is the transactions that i performed:
Thus, when the bank will issue me a fresh credit card statement on 18th november, the total amount payable by me is distributed as follows:
Interest calculated = (outstanding amount x 3.25% pm x 12 months x no of days) / 365
Interest on $ 15000 @ 3.25%pm from 19 October to 11 November (i.e. for 23 days) = $ 368.63
Interest on $ 13000 @ 3.25%pm from 12 October to 14 November (i.e. for 3days) = $ 41.67
Interest on $ 5000 @ 3.25%pm from 19 October to 14 November (i.e. for 26 days) = $ 138.90
Interest on $ 3000 @ 3.25%pm from 15 November to 18 November (i.e. for 4 days) = $ 12.82
Interest on $ 1000 (fresh spends @ 3.25%pm from 14 November to 18 November (i.e. for 5 days) = $ 5.34
Thus, total interest of $ 567.37
b ) Total principal amount outstanding = $ 4000
( $ 1000 fresh spend + balance $ 3000 outstanding from last month’s billing period)
Hence Total Amount Due = (a) + (b) = $ 4567.37
Assuming, I have $4567.37 of total outstanding due on credit card debt and if i pay my debt only through making minimum payments of 5% of total amount due with APR of 39% per annum, in that case:
- It will take me 13 years and 2 months to pay off my credit card debt
- A total of $6949.38 interest will be paid on current balance of $4567.37 till the debt is fully paid up.
Refering to the terms and conditions of my credit card, i found that my credit card attracts two kind of fees:
- Annual Fees
- Renewal Fees
Although there is no kind of inactivity fees mentioned.
Following are the steps to pay off the credit card debt sooner:
Since APR of 39% is huge and this is the reason that it will take me so many years to pay off my debt. However, the best possible way to pay my credit card debt sooner will be consolidation of debt which includes applying for a fresh line of credit or transfer of credit card debt to lower rate of interest. Although, this will attract a fee of 3-4% but shifting to lower interest rate will help me pay off my debt sooner.
Paying more than Minimum Payment:
Even if i am unable to shift to lower interest rate credit card, paying more than minimum payments will lead to fast payment of outstanding debts.
Avoiding unnecessary expenditure:
Use of credit cards at bars, clubs should be avoided to increase the debt balance.
Advice to Young Applier of Credit Card:
Although complete avoidance of credit card is not possible in US since it is used even for petty items like xerox, petrol refilling etc, but control over the expenditure and using the credit card according to the monthly budget will not lead to any financial distress later on.