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Credit Video 3: Learn how minimum payments on your credit card can take a huge chunk out of your wallet and your life. Using 3 scenarios, the Credit Counselling Society talks about the dangers of only making minimum payments and also the benefits of tackling your credit card debt!
For more information on your credit ratings and credit report please see our other videos by visiting: http://www.mymoneycoach.ca.
If you’d like to book a free and confidential appointment with one of our credit counsellors please call us at 1-888-527-8999 or visit us at http://www.nomoredebts.org. Free & confidential!
In this video we will touch upon:
Understanding how you can have “great credit” but a lot of debt cause when you’re only making minimum payments most of your payment is going towards interest.
The cost of minimum payments is what we’re going to focus on and to demonstrate what we mean, let’s go through three scenarios together:
In the first scenario, we’re going to pretend that you went on a trip and you didn’t have the cash for it, so you used your credit card. After you got back, you put the pictures up on social media and shortly after that, your first bill arrives. Since you didn’t have the cash to pay off the full $5000 you spent on your trip, let’s do the math if you only made minimum payments on your credit card:
Let’s say the annual interest rate on your credit card is 18.9%, and the credit card company is asking you to make minimum payments of 3% per month, which is about $150. How long do you think it would take for you to pay off your $5000 balance?
a) 3 years
b) 10 years or
c) 20 years
Answer is “c” 20 years! And can you guess what you’re going to pay in interest? It’s around $5,300!
Now that you have some of those scary numbers in mind, let’s jump into our second scenario:
Let’s pretend you took the same trip costing $5000 but instead your credit card interest rate is 19.9% and the credit card company is asking for minimum payments of 2% per month. If you compare this to our first scenario, all we really did was increase the credit card interest rate by 1%, from 18.9% to 19.9% and we lowered the minimum payment by 1%, so from 3% to 2%. How long do you think it will take for you to pay off your credit card?
a) 25 years
b) 40 years
c) 65 years
Answer is: 65 years! And guess what you’ll pay in interest during that time, over $22,000 dollars! See how big of a difference the interest and minimum payments can make?
Now let’s take a break from the scary numbers and look at the third scenario, which will put things into a better light. If the interest was still 18.9% on your credit but instead of minimum payments, you decide to make monthly payments of $325 until the credit card is paid off. How long do you think it will take you to pay off your credit card?
a) 6 months
b) 18 months
c) 24 months
It’s (B)! 18 months! And the interest that you’ll pay will be a little over $770. Wow, what a difference from the first two scenarios!
Even though that sounds great, the best case scenario would be for you to save $5000 for the trip, so you can pay your credit card off in full when you get back, which means no interest payments at all! If that’s the case then, your only worry becomes what SPF to use!
For more information on credit report please see our other videos by visiting http://www.mymoneycoach.ca.
If you find yourself in the minimum payment cycle and you want a way out, please call us at 1-888-527-8999 or visit us at http://www.nomoredebts.org.
Videos were created by the Education Department at the Credit Counselling Society – if you want to learn more about our team and would be interested in having financial literacy workshops at your workplace/organization please contact us: http://www.nomoredebts.org/credit-counselling-society/consumer-services/credit-budgeting-workshops.html