Most people have credit cards. If you are a newbie when it comes to credit cards or find yourself caught up in the cycle of credit card debt, then this article may help you better manage your payments.
Remember, if you pay your balance each month, you can avoid paying interest. That is a great way to minimize expenses and build up credit.
How is your balance calculated?
Every time you use your credit card, the amount charged is added to the card’s balance. However, your balance is not limited to what you buy. It is also affected by the interest you pay each month.
There are also fees that many people pay. Some credit cards charge an annual fee. They also charge you for transaction costs when you get a cash advance. Late payment fees are also a factor for many people.
When you get your bill at the end of the billing cycle, you will be informed how much total you owe. You will also be informed of the minimum amount you need to pay along with a due date.
If you don’t pay off the card in full, then the remaining balance carries over to the next billing cycle.
Understanding Minimum Credit Card Payments
So, what is the minimum payment on a credit card? According to SoFi, it is “the lowest sum you can pay each billing cycle.” If you don’t pay at least this amount, you will be charged a fee. Your interest rate could go up as well.
Paying the minimum amount is all that is necessary to maintain your credit rating, avoid penalties, and be able to continue to use the card in good standing. However, if all you pay is the minimum, you will be struck with ongoing interest payments.
How do interest rates work?
Credit cards use an annual percentage rate (APR) to calculate how much interest you owe per billing cycle. The APR is divided by 12 before it is applied to your credit card balance.
To see how this works – let’s say that you charged $1000 on your credit card this month and your APR is 12%. Divided by 12, this is 1% for the month on the balance owed.
Let’s say you already have a balance of $1500 on the card. With the additional purchase, you will now owe $2500.
If you pay $500, then you are left with a balance of $2000. The interest you will be charged for that month will be $20. That increases the amount of your debt to $2020. The following month, if you don’t pay this off, you will be charged another 1% on the total amount, and your added interest will be $20.20.
This shall not seem like a lot, but it can add up.
The best way to manage a credit card is to pay it off every month. If you can’t do that, pay off as much as you can. Always try to pay more than the minimum balance.