What is the Declining Minimum Payment Method?
The declining minimum payment method is what credit card companies use to calculate your monthly payments -- which is designed so that your payments get smaller as your balance-owed gets lower. The two most common formulas used to employ the method are explained below.
Minimum Percentage Formula
Typically these payments are calculated by multiplying the balance you owe by a small percentage, usually between 2% and 5%. If the percentage causes the payment to fall below the stated minimum dollar amount (usually $10 to $15), the minimum dollar amount is used.
For example, if you have a $2,000 balance on card carrying an 18% APR with a minimum payment percentage of 2%, and a minimum dollar amount of $15, then your minimum payment would be $40 (2000 x .02). You can calculate your own minimum payment here.
The future financial happiness killer is that your interest charge for the month would be $30 (0.18 APR ÷ 12 months x 2000), which means that only $10 of your $40 payment is going to reduce what you owe. Ouch!
More and more credit card companies are adopting this method, which calculates 1% of your balance and adds it to the current month's interest charges.
In this case, referring back to the earlier example, your minimum payment would be equal to $30 interest plus $20 (.01 x 2000) for a total payment of $50.
A Perpetual Windfall for Credit Card Companies
Regardless of which minimum payment formula they use, credit card companies make a fortune from luring their spendthrift customers into making only the minimum monthly payments on their revolving charge accounts -- which usually barely covers the current month's interest charges.
And because so little of your payments go toward paying down what you owe (the principal), these payments can easily last for 10, 20, even 30 years -- and cost you thousands of dollars in wasted interest charges.
And guess what? If you are a responsible borrower and always make your payments on time, the credit card companies reward you by asking you to pay exorbitantly high interest-rates to pay for all the irresponsible borrowers who file bankruptcy on their credit card balances.
Now doesn't that make you feel special?
Fix Your Payments and Save a Ton!
One of the easiest ways for you to save a fortune in interest charges is to turn your current minimum monthly payment into a fixed payment.
In other words, whatever your current minimum payment is, just continue to make that payment amount until your balance is paid off. Then force yourself to never carry a balance on your credit card ever again. Instead ...
Become Your Own Credit Card Company
Once you pay off your credit card, begin depositing the freed-up monthly payment amount into a savings account.
That way you can use a debit card to borrow from yourself and only be out 0.5%-2% interest earnings rather than paying 18% - 29.99% interest to the card companies.
4 Simple Steps to Paying the Most for Everything You Buy
If you are determined to pay the highest possible price for everything you buy, here are the 4 steps:
1. Put all of your purchases on credit cards.
2. Make only the minimum payments on your cards.
3. Make all payments after they are due to trigger the late fees.
4. Skip the first payment to jump your APR to the 29.99% maximum asap.
If you "play your cards right" you could easily increase the cost of a $100 item, to well over $500.
In turn, this will afford you the opportunity to work 5-times the hours to buy the same amount of stuff.
Don't laugh, millions of consumers are actually following these 4-steps! Please don't be them!!