A famous New York real estate mogul and reality TV star once proudly declared, “I love debt. I love playing with it.”
While the 1% can certainly use debt as a financial tool, if you finance daily purchases at 22% interest only to pay the minimums, you aren’t playing with debt. You might be getting played as you may find that standard finance charges significantly outpace your repayment efforts
But say you fall for it and open a credit card with a relatively low credit limit, buy a bunch of stuff and set up automatic payments to stay on top of your credit. Are you actually aware of the financial penalty you pay when you only make minimum payments?
Credit card issuers typically calculate your minimum payment using a formula like 1% to 2% of the principal balance plus that month’s interest. For instance, on a $5,000 balance at a 22% interest rate, your first monthly minimum payment would be roughly $141.
However, $91.67 of that $141 goes directly to the bank as an interest fee, knocking a mere $49.33 off what you actually owe. This process turns a temporary balance into a multi-decade financial anchor, potentially forcing you to pay double, triple or quadruple the amount in interest versus the amount you originally borrowed.