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I'm relatively new to credit cards, and since getting one when college started, I've been constantly told by family to pay the FULL amount at each billing cycle. I know it is the best thing to do, but with this holiday season in full swing, I may have spent more than I should have. My question is:
What actually happens when I only pay the minimum amount? Will my next billing cycle be an outrageously large amount beccause of the interest rate, etc?

I'm just not sure how that works. My monthly bill says I have a periodic rate of .05425% and a corresponding APR of 19.80%.......what does this mean!?!

Please reply ASAP. I appreciate your help.

Sincerely,

Michael
MiEcho@yahoo.com
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Your next bill will include interest on whatever balance you don't pay in full. When the interest will begin to accrue depends on your card. Your best bet is to take it out of your wallet and pay it off before you use it again. Your minimum payment is usually something ridiculously low like 1/20th of your outstanding balance. If you read enough posts in this forum, you will see that far and away the most Foolish ones pay the piper in full each month.
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Hi Michael, Leviathan and your family are right: paying it off in full each month is the best way to go. A lot of us have gotten into trouble with credit and speak from experience.

That said, your best bet if you have to pay it off over time is to have a plan in place beforehand (but I would never carry a balance at 19.8% if it's avoidable)... since you have already bought what you have bought, I would:

1) Take Leviathan's advice and put the card up until it's paid off.

2) Figure out how long it will take to pay back, based on the amount of the debt, the interest charged, and how much you can afford to pay off each month.

APR stands for Annual Percentage Rate. Your periodic rate is how much interest you pay per day.

Here's a quick way to estimate your interest charges:

.198 * (amount owed) / 12 = Monthly Interest

For instance, if you owe $3000, your monthly interest is about $50. If you pay off the debt at $200 a month, you will actually pay off about $150 a month in principal...

So 3000 / 150 = 20 months to pay off.

It will actually take a less time, because the interest will go down as the balance goes down, but that's a good way to estimate it.

Paying off a set amount each month without looking at the minimum payment will get you in the habit of paying it off so that eventually you won't miss the money so much.


A word of advice, I have been where you are, and I went down the wrong road. You are very wise to take action now, rather than waiting to pay it off and assuming you will make a lot of money when you get out of school.

Good Luck and Merry Christmas,
lamarama
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What I would suggest is this: if you find yourself with some extra money at the end of a week, send it off to the cc debt. You would be surprised how fast $20 here and there adds up. You need to send it in with a letter identifing your account number and such.

Catleen
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I'm just not sure how that works. My monthly bill says I have a periodic rate of .05425% and a corresponding APR of 19.80%.......what does this mean!?!

The "periodic rate" of .05425% is the daily interest rate on your balance (you get this by dividing the 19.8% by 365). The credit card company determines the amount that you owe them based on daily compounding. In other words, you pay interest not only on the amount that you purchased but on all the previous days' interest. Using daily compounding, a 19.8% interest rate is equivalent to a 21.9% interest rate compounded annually.

Will my next billing cycle be an outrageously large amount because of the interest rate, etc?

It is not likely to be outrageously large. The actual amount will depend on the amount and number of days for which you are being charged interest. The key here is not to be lulled into a sense of security by what may be a seemingly small interest charge.
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My question is:
What actually happens when I only pay the minimum amount? Will my next billing cycle be an outrageously large amount beccause of the interest rate, etc?


Hi Michael!

There's nothing wrong with this. Everyone pays interest once in a while, and all that will happen is that there will be a few bucks added on to your balance in the next bill. Then, hopefully you'll pay the bill in full at that time.

There's certainly nothing to be concerned about, and it's surely no shame. : )

Of course the amount of interest will depend on the balance you have, but I don't think you're going to be too upset.

Have a great holiday!

Tony
...but I still am...

Off2Aruba
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Michael,

Listen to your family, pay it in full!!!!! If you can, don't use it unless you have to. It has taken me years to get rid of my credit card debt, don't get caught in that trap. It has been a long fight. My credit card balance was $8,000 just a few months ago, but it was never really much lower than that for several years. I would pay some, but charge some more. It has been like a "Nightmare On Elm Street" life for me. Don't get started.

>but with this holiday season in full swing, I may >have spent more than I should have.

Which is what the American culture dictates that you do. That's another problem. I saw a lot of fools (lowercase "f") buying gifts and paying them with plastic. From now on, if I don't have the green paper to pay with, I won't buy it. Period.

>I'm just not sure how that works.

Example: MBNA America -- one of my Master Card accounts that I recently closed for good -- sent me a letter a few weeks prior to Christmas. It was a "nice" letter that even included a few blank checks to make my Christmas season a more convenient one. Aren't they just so sweet? They want you, be careful!!!

>My monthly bill says I have a periodic rate
> of .05425% and a corresponding APR of
> 19.80%.......what does this mean!?!

19.80% means that your credit card's interest rate is insanely high. It means that, if you only pay the minimum payment each month, your children will someday "inherit" your debt. Vultures (credit card companies) love it if you only pay the minimum.

I am 35, and I first started the nightmarish life of being in debt when I was 24. It was only a ZCMI card with a limit of $500. I had to struggle really hard to get that first card. Credit is necessary, I realize that, but one does not need to get into debt to get good credit. Ever. I slowly got into the habit of buying things with my credit cards, which was a big mistake. Impulsive buying was a problem after I started "wearing" my credit cards. I now have 99% of my credit cards filed where they belong: IN THE GARBAGE.

Carlos.
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...I'm just not sure how that works. My monthly bill says I have a periodic rate of .05425% and a corresponding APR of 19.80%.......what does this mean!?!

Please reply ASAP. I appreciate your help.


One other tip in addition to the good advice that you've already received - you don't have to wait until your next bill to send another payment. If you can't pay it all by the next due date, send in the rest as soon as you can. For example, if you're paid biweekly, send in what you can in another two weeks with a short letter giving the account number and asking that they apply it to your account. Since interest is calculated daily, the sooner you'll pay, the sooner you stop the interest charges.

And another thing - when you pay off the final amount, add maybe another 2%. This covers the interest that had accrued since your last bill. You might end up with a small positive balance, but it will stop you from bleeding interest.

John
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If you want to keep it simple think of this way, for everything you think costs 99.00 its really 118.00....eventually you may reach a point where your minimum payment does not decrease your total balance noticably....If you cant pay cash you may want think twice about buying it, unless it is investment debt, which is different then consumer debt and another chapter...

Good luck to you and beware the debt monster. ;)
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