Why should I pay more than the minimum on my credit card?

“John, other than not wanting to pay interest, is there any other reason I should pay more than the minimum on my credit card?”

Wow, what a dangerous question. Not only are you paying interest but you’re allowing the accrual of debt to occur at a rapid pace. Do you pay close attention to your credit card statement? If you do, you may have noticed the information on your credit card statement includes not only the minimum amount due, but also how long it will take you to pay if off paying only the minimum. You can thank the Card Act of 2009 for that.

According to the Card Act, credit card issuers are required to do the following:

Include in the monthly statement how long it will take to pay off the bill and the total cost to the consumer as a result of paying only the minimum amount due.

Include in the monthly statement how much the consumer should pay each month to pay the bill off in three years, the total cost to the consumer in doing so, and the savings compared to paying only the minimum payment.

Credit card bills include a payment information section with the balance, minimum payment, due date, late payment warning and minimum payment warning.  Most include a table indicating how many months it will take to pay it off by paying the minimum and how much you will end up paying over that time.

The following examples are from actual credit card statements. For a bill of $990, it would take 3 years to pay off by paying only the minimum of $35 each month.  The total paid would be $1220 or $230 in interest at an interest rate of 14.5%.

Here is another example; a bill for $2,600 would take 17 years to pay off at the minimum of $52 each month. The total paid would be $5,273 or $2,673 in interest at an interest rate of 14.5%. This is two times the original bill.  Paying an additional $37 a month or $89 a month would pay it off in 3 years and you would pay $3,220 or $620 in interest.  This is a huge difference!

This information is based upon not charging anything else on the card and paying off that balance.  Obviously, the balance amount will continue to go up each month, if you continue to charge more.  Paying more than the minimum will help reduce the amount you owe.

Further, there’s a credit score problem brewing for you as well.  The closer you are to your credit limit, the lower your credit scores will likely be. Your debt accounts for some 30 percent of the points in your FICO credit score and is highly influential in your VantageScore credit score. You are considered a higher risk when you use more of your credit limits.

The question was: Why should I pay more than the minimum on my credit card? The answer is: to save money and to improve your credit scores and stay out of credit card debt.

JRU on 60 Mins SetCredit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and CreditSesame.com, founder of www.creditexpertwitness.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  You can follow John on Twitter here

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