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Making the minimum

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Credit cards are fairly easy to obtain – if your credit score is okay – and convenient. They can also put you in a world of financial hurt, especially when you run up big debt on high-interest-rate cards. You don’t plan to do that, of course, but it can happen almost before you know it especially if you make only the minimum monthly payment.

The minimum payment on credit cards is determined either by a percentage of your outstanding balance (usually 2-3%) or a small monthly fee (usually around $10). These are relatively small amounts but if you only pay the monthly minimum, it will take years to pay off your credit card balance.

Let’s say you have an outstanding credit card balance of $2,000 with an interest rate of 19.99% and a minimum payment requirement of 3% of the balance. Your initial monthly minimum payment would be $60 and if you make only the minimum payment every month, it would take you 15 years and 3 months to pay off your balance in full and you would end up paying $2,238 in interest That’s more in interest alone than your original balance – so it’s easy to see that increasing the minimum monthly payment by even a small amount can drastically reduce the length of time it will take you to pay off a credit card balance and the amount of interest you will pay.

Heap and sweep to save

‘Heap and sweep’ is a popular strategy that may allow you to avoid high interest costs and reap the benefits of reward credit cards.

  • Heap by using your credit card for as many day-to-day purchases as possible each month. With every purchase made, you ‘heap’ the rewards (cash back, travel, and so on) of your rewards cards.
  • Sweep at the end of each month, or just before your credit card payment is due by ‘sweeping’ your balance clean through automatic payments from your bank account.

Be aware that the ‘heap and sweep’ strategy only works when you are disciplined enough to track your expenditures closely and financially able to pay off your credit card balance each month.

With the right strategies, credit cards are useful financial tools. The same is true of your overall financial life – with the right strategies, you can achieve all your financial objectives. A good place to start is by talking with your professional advisor.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

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