Credit Card Interest

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Until 2006, if you charged $2,000 on your credit card and then made only the minimum payment each month, it would take you roughly 18.5 years to pay off the debt. The minimum payment was typically 2% of the balance, so in our example it would have been approximately $40.00. Unfortunately, those $40 payments would have primarily gone toward the interest on your account, leaving the principal relatively untouched. At that rate, you would repay the bank $5,668 dollars for your $2,000 worth of charges. The privilege of borrowing would have cost you $3,668. So, not only did you have to repay each dollar you borrowed, you paid an additional $1.83 to borrow each of those dollars.

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Early in 2006, the major credit card issuers agreed to increase the amount of the minimum payment due on each account, thus reducing the term required to pay off the account in full if only minimum payments were made. A few lenders doubled their minimum payment percentage to 4%, but more opted to phase in the increase over time. No matter the rate of interest being charged, it is almost always better to make more than the minimum payment every month, and to pay off accounts in full every few months if possible.