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Credit Cards Trick You Into Paying Interest

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Do you ever pay just the minimum required amount on a credit card balance even if you could afford to pay more? You’re not alone. New research shows that 20% of credit card users who can afford to pay significantly more than the monthly required minimum—typically 2% to 3% of the balance—do not pay more than that or pay only a little more, which tremendously increases the amount of interest they end up paying over time.

Why do people pay less than they could? One reason is that the minimum payment often is featured by the credit card company as the most prominent number on the bill, so many consumers fixate on it—which is exactly what the card companies hope they will do. Even worse: Decades ago, the typical required monthly minimum was closer to 5%, but credit card issuers found that it was more profitable to reduce that amount because the longer a consumer takes to pay off an outstanding balance, the more interest the consumer ends up paying.

To avoid this trap: Ignore the minimum payment amount suggested by the card company, and instead calculate a personal monthly minimum payment based on how long you want to take to pay off your debt and what you can reasonably afford. Helpful: Search online for “Bankrate Credit Card Payoff Calculator.”

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Source: Benjamin Keys, PhD, assistant professor at the Wharton School of the University of Pennsylvania, Philadelphia. His research focuses on mortgage and credit card markets. Real-Estate.Wharton.upenn.edu Date: February 1, 2017 Publication: Bottom Line Personal