"Reminder: If you only make the minimum payment every month, it will take approximately 101 years and five months to pay the entire new balance shown on this statement."
By charging a couple of substantial charitable donations and a big holiday, I have to admit I had run my credit card hot to reach a $49,367.15 balance.
But suddenly that minimum payment of $1,036 didn't look quite so attractive anymore. And seeing 19.99 per cent annual interest was charged on regular purchases (21.99 per cent on cash advances) compounded the shock.
Each month (assuming you made no more purchases) the minimum payment would go down - which would also slow the rate of debt reduction. In the first month, the debt would be reduced by $231 with the remaining $805 going to cover the interest.
Without any interest, that monthly $1,036 would pay off the balance in just over four years. But at 20-per-cent interest and taking more than 100 years, you would pay $124,796 interest, according to calculations done by David Chalmers, of Nicola Wealth Management. "Clearly it's better to earn than to pay interest," he said.
If you don't pay off your credit card balance each month, you are paying that 20-per-cent annual interest rate for the convenience of flashing the plastic - compared with setting up a far cheaper line of credit or taking out a personal loan.
Note that credit card interest rates vary widely - some with a lower rate and some running as high as an effective annual rate of more than 30 per cent.
Bottom line: Do try to pay off your credit card every month, and if you must carry an outstanding balance for a few months, use a line of credit or personal loan (especially at today's relatively low rates) to pay off the card - provided you then don't run up the card again.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows. Email [email protected].
