Why make more than the minimum payment?
One of the biggest impacts of purchasing with credit is time — the longer you take to pay off your credit card balance, the more interest you'll pay and, ultimately, the more expensive it will be. Only 48 percent of high school seniors surveyed by the Jump$tart Coalition knew that credit card holders who pay only the minimum monthly payment incur greater annual interest charges than those who pay off the full balance each month. So clearly, this is a good topic for discussion.
Ask your teen: How long will it take to pay off a $500 balance making the minimum payment versus paying $50 or $100 a month? The difference is surprising!
As you can see, simply doubling the minimum monthly payment to $20 knocks off 36 months from the payoff time. The more you can pay each month, the more dramatic the savings. Plus, keep in mind that these figures assume you wouldn't add any additional charges to your outstanding balance and that your interest rate never changes.
Also note: In this scenario, if you make only the minimum payment each month, when the balance is finally paid off you will have paid nearly $200 in interest on your original $500 balance versus only about $16 if you made $100 a month payments.
To work out other payment scenarios, go to the interactive Credit Card Payoff Calculator in the Planning Tools section of this Web site.
| Balance Due | Interest Rate | Payment Amount | Months Until Paid Off |
|---|---|---|---|
| $500 | 12% | $10 minimum | 65 months |
| $500 | 12% | $20 | 29 months |
| $500 | 12% | $50 | 11 months |
| $500 | 12% | $100 | 6 months |