In difficult economic times where most investment options are performing poorly, if not losing money altogether, there is one risk-free way to achieve double-digit returns. This is an option that few people think of. This is avoiding the high interest charges associated with carrying a balance on credit cards each month. Most credit cards charge 12-20% interest, or more, on balances not paid off in full. Avoiding these interest charges adds up to a higher return than the stock market has averaged per year since 1926 (10.3% average annual total return on common stocks, according to Yahoo Finance).
Furthermore, if you pay only the minimum payment each month on cards that carry large balances, most of that minimum payment goes toward interest, and not reducing the balance. Over time, much more than the original balance has been paid in interest alone!
As an example, let’s look at the same balance with three different interest rates, when only the minimum amount due is paid each month. Using a balance of $5000 with a $150 minimum payment, even for those fortunate enough to have a competitive interest rate of 13%, it requires 42 months to fully payoff the debt on the card, assuming no new charges were made or fees assessed to the borrower, which is a generous assumption.
With a $5000 balance and an average interest rate of 18% and the same $150 minimum payment, it takes 47 months to pay the card off. For borrowers that have a lower credit rating and face a higher interest rate of 25%, paying the minimum each month still requires a lengthy 58 months (or approximately $8700, almost half of which was interest!) to eliminate the debt.
From these figures, it is clear that a lower interest rate shaves many months off the time necessary to pay the balance off, for those that cannot pay their balance in full each month. Furthermore, many card issuers will offer a great introductory rate for transferring balances from higher-rate cards to their card. Often, these balance transfers will have 0% interest on transferred balances or new purchases for an introductory period of a few weeks or months.
Paying your credit card off in full each month is the best way to save money in these difficult economic times. If that is not possible, then at pay off more than the minimum payment by as much as you can afford. Last resort, switch to a balance transfer at a greatly reduced interest rate can save you hundreds of dollars in interest.
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