Maximum Interest, Minimum Payment

Posted By: Dr. Frugal in Loans on 09/02/2007 at 17:26:11

Compound interest is a real problem with credit card debt because the interest rates are so high. Interest rates on credit cards can run to 20%, which means you really, really have to be careful about using this life on credit. Compounding those rates can pile up charges quickly.

One of the ways consumers find themselves in trouble with credit card debt is by only paying the minimum amount each month. In 2005, regulators tightened the rules that credit card companies use for setting minimums. Before these new rule, it was possible that a consumer who paid the minimum would never be able to pay off their balance because the monthly finance charge was larger than the minimum payment. Regulators now require that some portion of the payment go towards the principal of the debt, but it can still take years and thousands of dollars in interest to pay off credit card interest thanks to the compounding.

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