Lenders Profit From Your Minimum Credit Card Payments

How credit card companies allocate your payments to maintain your debt

Lenders Profit From Your Minimum Credit Card Payments
November 8, 2016

Credit cards have become a crucial financial lifeline for many people, and are often used as part of daily life rather than for emergencies. It is tempting to only pay the minimum each month, with accountholders believing that they are chipping away at outstanding debt. However, with minimum payments having decreased over the past few decades, many people are paying a lot of interest, creating more debt for themselves and keeping up profits for the lenders.

According to the Consumer Financial Protection Bureau, around 15% of credit accounts receive the minimum payment each month. Though this once helped to keep people ahead of their debt, rising interest rates and lower minimums mean that debt levels can rise once all costs are taken into account. For example, paying the minimum on a $10,000 credit card debt will take you 30 years to repay. Having a large outstanding balance can affect interest charges. Also, many lenders will allocate the minimum charge to paying off the debt with the lowest interest rate first to maximize their income.

Not everyone is able to clear their debt each month and, therefore, will be subject to some interest costs. It is useful to use the traditional approach of the 1970s when at least 5% of the outstanding debt was cleared. For those with good credit, transferring the balance to a 0% interest credit card could offer savings that far outweigh any transfer fee.

If you want more credit, check out MoneyTips' list of credit card offers.

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