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Read Dave Ramsey’s advice before you pay your next credit card bill.
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When it comes to credit cards, it’s important to use them wisely so you can benefit from the cardholder rewards they provide but not end up getting stuck with high interest charges that can come with carrying a balance.
Unfortunately, finance expert Dave Ramsey warned some people make a big mistake with their cards that can end up costing them. Here’s what the error is and why it can be such a big problem.
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Are you making this costly credit card error?
The error Ramsey warned about has to do with how you pay your credit card bill when your statement comes.
“Most credit cards also have a minimum payment,” Ramsey explained. “But be careful not to confuse that for paying your balance in full. While paying the minimum payment may technically keep you in ‘good standing’ with the credit card company, you’ll still get charged interest on whatever you didn’t pay.”
See, your card’s bill will come and it will specify how much you must pay. You may assume that as long as you meet that requirement, you’re all good and won’t owe anything extra. But that’s definitely not the case. If you pay only the minimum, you could end up with a huge balance carrying over to the next month — and would have to pay interest on that entire balance.
In fact, card companies typically set the minimum payment very low — often to around 1% to 5% of the total outstanding balance, depending on the card. If you only pay the minimum, most of the payment will go to interest rather than to paying down the principal balance. The result of this is that your balance will remain high, you’ll pay a huge amount of interest, and it will take you a very long time to pay the card off entirely.
What should you do instead?
Instead of paying the minimum balance on your card, ideally you’ll pay the entire statement balance. That means paying off every dollar you charged on your card over the course of the billing cycle.
If you pay your balance in full in its entirety, you won’t owe any interest at all. Your card company will have given you an interest-free loan from the time you charged the purchase until the date your payment is due. And you will ideally have earned rewards on top of that amount. So, you’ll get all of the benefits of being a cardholder without that downside of high interest costs.
Ramsey warns some people have a hard time paying their full balance, which is why he suggests not using cards in the first place. But, if you simply keep track of what you’re spending on your cards and make sure you aren’t going over the amount you budgeted that you can pay back in full, you shouldn’t run into this problem. You’ll have plenty in your bank account to pay your entire balance down and you’ll get to walk away with the bonus rewards and credit-building benefits your card offers.
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