CREDIT LIMIT: A credit limit is the amount of credit that is extended to you on your credit card.  If you stay below this limit, then there will not be any issues. 

If you accidentally charge more to your card than is allowed (your balance exceeds the limit), you will often be charged an additional fee and may even have your credit card declined. 

 

Credit limits are set by the credit card company to limit their risk.  If you feel that your credit limit is too low, you can ask the company to increase it for you.

MINIMUM PAYMENT:  On each monthly statement, you will see two different numbers – the minimum payment due and the credit card balance.  The credit card balance is the entire amount that you owe on that credit card while the minimum payment due is the amount that you must pay during that billing cycle.

Often, the minimum payment is much less than the full balance of the credit card, sometimes covering only slightly more than the interest that the credit card accrues each month.  You should pay more than the minimum payment on your credit cards each month in order to pay them off more quickly.

We will evaluate two different options to determine what the real cost of paying the minimum payment is on a credit card.  If you learn to pay more than the minimum payment each time, you will not allow your debt to become so high that it impacts your credit score.

In both options, we will assume that we have a credit card with a current balance of $3500. 

 

No more purchases will be made on this card – just payments.  The interest rate is 18% and the minimum payment is 2% of the card’s balance (which is higher than most credit cards actually offer).

Option 1 (top) is what will happen if you only ever make the minimum payment amount.

Option 2 (bottom) is what will happen if you pay a flat fee of $75 each month until the balance is paid off. 

Note that the initial minimum payment is $70.  By adding only $5 per month and by keeping a fixed payment amount instead of changing it as your balance decreases, you will pay off your cards much faster (and not ruin your credit score in the process!).

These examples were created using the minimum payment calculator at www.bankrate.com