Debts and Credit Cards

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Debtsand Credit Cards

Intoday’s society, banks offer a broad range of services thatguarantee a customer to get a loan or money so long as they meet therequired threshold set by the banks. An example is the use of creditcards whereby an individual can buy anything with the credit cardthat does not surpass the credit limit. Most banks charge an interestrate on the amount owed to them by the customer. There are two waysin which the customer gets to pay, which include paying by minimalpayment or paying at a go using the agreed interest rate (CHIEN,etal. 2001).

Themost convenient method of credit card repayment.

Asstated earlier, the credit can be paid using the two approaches thatwere mentioned above. It is important to highlight the pros and consof the two methods so as to determine which method is efficient andcheaper.

Theminimal payment involves paying a fixed interest rate of the balancemonthly. For example, the interest rate can be set at 2% monthly andif the credit balance is $5000 it means that the end of the month theamount to be paid will be $100.The next month one will be required topay the same interest on the remaining balance which will be $99.42.The calculation used is based on interest rate being 18%, minimalpercentage of balance 2% and minimal dollar amount $25.It will takeclose to 325 months to pay off the debt and at the end one will havepaid $10046.61. The total amount paid will be twice more than thedebt meaning that the minimal payment method will be very expensive.

Theother method involves paying the interest and debt at a go. For theexample if the debt was $5000 at an interest of 18% the final amountgiven to the bank will be $5900.The final amount shows that it willbe cheaper and convenient (CHIEN,et al. 2001)

Conclusion

Fromthe above findings, it’s noted that the minimal payment method ismore expensive than paying using at a go payment method. Mostcustomers like to use the minimal payment because they think it ischeaper paying monthly as in the above case a customer would pay $100compared to the one who paid the debt plus interest at a go. Theminimal payment at no particular moment does it help the customer tosave a few dollars but only to increase the duration of the debtrepayment. It is not advisable to use the minimal payment if you canrepay the debt at once (CHIEN,et al. 2001).

Reference

CHIEN,Y. W., &amp Devaney, S. A. (2001). The effects of credit attitudeand socioeconomic factors on credit card and installment debt.Journalof Consumer Affairs,35(1),162-179.