Using minimum knowledge for maximum credit card savings

To save, understand your credit card

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The most important information on your monthly credit card bill isn't necessarily the balance.

Instead, that could be the little box out front -- mandated under the federal Credit Card Act of 2009 -- explaining how long it would take and how much it would cost in interest payments to retire the balance if cardholders only made the minimum payments.

The so-called "minimum payment warning" can be a disturbing statistic that anyone who carries a revolving balance should take time to contemplate, said Bill Hardekopf, CEO at the credit card comparison site Lowcards.com.

For example, a cardholder with a relatively modest $1,500 balance at an annual interest rate of 18 percent and a minimum payment due of $37 would take roughly 13 years to pay off the entire bill making minimum payments. Over that period, interest charges would add up to nearly $1,800.

Card issuers use different formulas for calculating minimum payments. In general, cardholders can expect to owe a minimum of about 2 percent of the balance in order to avoid getting hit with a $25 to $35 late fee and possibly seeing a big boost in their interest rate. (Cardholders who consistently miss the minimum payment risk having their card shut off.)

Mr. Hardekopf called the minimum payment warning one of the best things that came out of the card act because it drives home, in individual terms, the costs of carrying a balance.

"It's a slap in the face. It personalizes the hurt," he said.

A recent survey by the California advocacy group Consumer Action indicated the notice has prompted many consumers to boost their monthly payments. Forty-five percent of those surveyed said they paid more every month due to the warning, while 15 percent said they sometimes paid more.

Adding even a little extra to monthly payments can dramatically reduce the payoffs costs.

Take the same cardholder with a $1,500 balance at 18 percent and a minimum payment of $37.

Over time as the balance falls, the minimum payment due also declines.

But if the cardholder continued to pay $37 each month, plus just an extra $10, it would slash the payoff period to about 3.5 years and cut the interest payments to $555.

The card act also required that, when cardholders make more than the minimum payment, the excess generally must be applied to the portion of the balance with the highest interest rate. That has amplified the big decline in payoff costs.

Issuers typically apply the initial payment to the balance with the lowest rate. That way, cardholders end up paying more interest.

Many consumers see their interest rate rise over time, so they end up with different rates on portions of their balance.

Mr. Hardekopf recommends that consumers also consider making "micro-payments" during the month.

"There's a misconception among consumers that they can only pay a card bill once a month," he said. But additional payments can be made at any time.

"Maybe you are in a bind and can only pay the minimum" on the due date, he said. But later in the month, with some belt-tightening -- such as taking a sandwich to work for lunch instead of eating out or renting a movie instead of going to the theater -- there might be enough savings to make another payment.

Focusing on making micro-payments "gets you into the psychology of paying off the debt," Mr. Hardekopf said.

Anyone carrying a revolving balance should try hard to stop adding to the balance and pay it down as fast as they can, Mr. Hardekopf said.

"For most people, they don't have any other debt costing them that much money," he said. Car loans or home mortgages generally carry significantly lower interest rates.

Online calculators can help people work out how much they'll save by paying more than the minimum each month. Try www.bankrate.com or the card issuer's website.

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Patricia Sabatini: psabatini@post-gazette.com or 412-263-3066.


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