A Word of Caution About The Minimum Payment Trap for New Cardholders

Hi,
One of the biggest risks for new credit card holders is falling into the minimum payment trap. The minimum payment trap can be described as the following:
The card holder is very careful in making purchases that he or she can pay off with their monthly paychecks. The minimum payment trap begins when a cardholder purchases an item or items that that exceed his or her ability to pay off with the end of the month paycheck. The majority of the time, the purchases are prudent and made financial sense. A good example is when he or she comes across a sale of needed office attire that is significantly reduced in price. When the credit card bill arrives, the card holder is aware that there will be a large balance due. He or she usually has the best intentions of paying a significant amount of money on the bill and getting things back on track over the next few months. When the bill arrives, the number that jumps out on the statement is next to the phrase "minimum payment due." It is, of course, substantially lower than the card holder had anticipated he or she would have to pay. In many instances the minimum payment is no more than interest on the credit card with just a small principal reduction included. A portion of new card holders might succumb to only making the minimum payment each month. These card holders will find, on an annual basis, that the balance on their credit card might very well remain the same, even though they have made twelve payments over the year. For these credit card borrowers, after a year of making minimum payments, a very interesting phenomenon takes place. The credit card company increases the borrowers credit limit "for making timely" payments. Many times this scenario is repeated on a year by year basis until such time as the borrower is buried in a mountain of debt with no chance of getting out from under it. Tomorrow I will talk about "the minimum payment trap- part 2!!!".
Until then,
Alan

Young Adults: First Credit Card

Hi,
When young adults apply for their first credit card, they need to be aware of hidden costs and fees, interest rate fluctuations, and the minimum payment trap. If ever it's the time to read the small fine print on the back of forms, applying for a credit card is when to do it. No one should feel embarrassed if he or she does not understand all the verbiage on the back of one of those forms. It's important to ask someone who does understand to explain all the terms and conditions to the prospective card holder. Here is a list of some of the items typically included in the small print:
1) If payment is late, by even one day, the interest rate may rise to the maximum allowed by state law in which the card is issued. For example, if the card is offered at 6% and the payment is one day late, the credit card holder reserves the right to reserve the interest rate to 19.9%+.
2) Most credit cards assess a $35.00 additional fee for any payment that is late.
3) If the credit limit is exceeded by even a penny, a $35.00 fee is assessed.
4) On many cards, when only the minimum payment is made, the principal is not reduced at all and only interest is being paid. Paying only the minimum payment is the start of falling into the minimum payment trap.
Tomorrow I will write more about the minimum payment trap.
Until then,
Alan