The credit card company’s goal is to make as much money as possible from your account. When they establish a low minimum monthly payment, they’re not trying to do you a favor; they’re trying to maximize their profits by keeping you in debt for a long time.
By paying credit card interest of $50 a month you’ve lost the opportunity to invest that money: Invested at 6 percent, $50 a month would total more than $57,000 in thirty-two years, the time it would take you to pay off a $2,500 balance at an APR of 19 percent (the average new credit card rate in 2020) if you never use the credit card again and make only the minimum payment. Plus, in that time you would pay more than $7,300 in interest charges.
Most credit card companies calculate minimum monthly payments at 1 or 2 percent of the balance due, including interest. If you made a purchase of $2,500 at an annual interest rate of 18 percent, it would take you more than twenty-seven years to pay off the balance by making only the minimum monthly payment. Here’s how that works: Initially, 2 percent of your balance would give you a minimum payment of $50, with around 75 percent, or $37.50 ($2,500 × 18 percent ÷ 12), going toward interest, and only 25 percent, or $12.50, reducing the amount you borrowed.
By the time you paid off the $2,500, you would have ended up paying interest of $5,897 in addition to the $2,500 principal you borrowed. Your $2,500 item will have cost you $8,397. How can you ever get ahead financially if you’re paying such exorbitant prices?
Paying any amount more than the minimum payment—even just $5 extra—can shave years and thousands of dollars from that payoff. Whenever possible, try not to use credit cards for purchases you can’t afford to pay in full right away.
It’s getting more and more difficult to protect your credit cards from theft. Thieves and scam artists keep coming up with more clever ruses to obtain the information they need to use your cards fraudulently or obtain credit in your name. Even your identity can be stolen.
Your best protection against credit card fraud is to know where your cards are at all times. Don’t carry credit cards with you unless you know you’re going to need them. Don’t leave them lying around on your desk at work or in your car or anywhere else they could be accessible to others. When you get a renewal credit card or you cancel a card, cut the old card up into small pieces, being sure to cut through the number. Ideally, run old cards through the shredder.
Don’t disclose your credit card number over the phone unless you’re dealing with a reputable company and you’re the one who placed the call to them. Scammers often use phishing scams whereby a computer dialer poses as your bank and asks you to call in to discuss transactions in your account. They send emails that look like they’re from your credit card company, warning you about fraudulent charges and asking you to enter your login information to verify your identity. Your bank will never ask you for personal information by email.
As soon as you realize your credit card, ATM card, or debit card has been lost or stolen, report the loss immediately to the bank or other issuer in order to limit your liability if the card is used fraudulently. Keep a list of your credit card numbers in a safe place so you can report the loss as quickly as possible.
Under federal law, if you report the loss before any unauthorized charges are made to your credit card, you can’t be held responsible for any charges. If a thief uses your card before you report it missing, the most you will owe for unauthorized charges is $50 per card. If somebody uses your credit card number fraudulently without physically stealing the card itself, you are not liable for the charges.
After the loss of your card, review your monthly statements carefully and report in writing any unauthorized charges. Lost credit cards should also be reported to each of the major credit reporting agencies: Experian, TransUnion, and Equifax. Ask them to place a security alert or a freeze on your account to intercept possibly fraudulent applications for credit.
Identity theft occurs when someone uses your personal information such as your name, credit card number, or Social Security number to commit fraud or theft. Using just your date of birth and Social Security number, thieves can apply for a credit card in your name, and rack up big charges before you even know the account has been opened. When the balance isn’t paid, the delinquency is reflected in your credit history.
Some thieves will even call your credit card company and report a change of address on your account, or they’ll access your account online and change the password and contact information so you can no longer access your account. Other scams include setting up cellular phone service in your name or opening a bank account in your name.
Be careful of how and where you dispose of bank statements, credit card offers, credit card statements, or any document that includes your date of birth or Social Security number. Consider purchasing a personal shredder and shredding these documents before throwing them in the trash. If you believe you have become a victim of identity theft, file a report with your creditors, the three credit reporting bureaus, the IRS, and your local police as soon as possible.
Effective February 22, 2010, the Credit Card Accountability Responsibility and Disclosure Act (also called the CARD Act) offers strong protections to credit card holders and limits the credit card issuers’ ability to charge credit card holders unfairly. Some highlights of this law are: