One of the biggest mistakes you can make with your credit cards is to pay only the monthly minimum and a shocking 1 in 5 Canadians is doing just this.
The minimum payment due on a credit card is the absolute lowest amount that your provider is willing to accept each month.
Why is this bad?
By paying only the minimum, you continue to carry a balance that triggers your card's APR and the longer you carry the balance, the more interest you'll be paying.
Example: If you charge 6,000 to a credit card with a 20% APR and your credit card provider gives you a $120 minimum, by paying just the minimum it would take you 106 months to pay off the full $6,000.
The interest accrued in those 106 months would be $6,603 meaning you'd be paying $12,603 for a $6,000 charge.
What to do if you can't afford more than the monthly minimum payment?
1. Cutting Costs
The first thing you should do is take an in-depth look at your financial situation and see where you can cut some costs to ensure that you're making more than the minimum monthly payment.
Here are a few suggestions:
- Cancel magazine or newspaper subscriptions
- Cut the cable and look into streaming services such as Netflix, Prime, Apple TV, etc.
- Memberships you rarely use such as gym, Costco, etc.
- Review your cell phone bill and look into more affordable providers
- Make your morning coffee at home rather than a daily trip to Tim's or Starbucks
- Take a lunch with you to work rather than eating out
While each of these ideas may only cut a few dollars each month, combined they will make for a substantially larger payment on your credit card debt.
2. Balance Transfer Credit Cards
A balance-transfer credit card is a low-interest card designed to receive debt from a card with a high APR. The low interest is usually a promotion, which lasts anywhere from a few months to a year or longer.
The trick is to pay a majority of your credit card debt (or all of it) before the promotional APR period ends.
If you have multiple credit cards, you can try the debt roll-down method. With this strategy, you list your debts from highest to lowest interest rate, pay the minimum on all your debts, then make extra payments toward the debt with the highest rate. Once you pay off the debt with the highest rate, you “roll down” your extra payments to the debt with the second-highest rate. Continue with this method you'll save an exorbitant amount in interest.
3. Pay Cash When Possible
Paying in cash will allow you to keep a tighter budget and you'll be much more aware of how much you're spending and on what. It's also a great way to avoid impulse purchases.
If you have any questions about improving your credit score or how it can affect your ability to purchase a home, contact us at jprealestateservices.com.
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