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Plan Well, Retire Well

Saving and investing your money

17.24% or 24.9% -- how does this rate of return sound to you?

Unlikely – for investments today! For the APR on a credit card this is typical but outrageous. Why do we accept paying these high interest rates on credit card bills? Just think about the potential of investing the money spent on interest into a long-term investment.

Every day that you pay on a credit card balance with a high interest rate you are losing the opportunity to invest these dollars somewhere else. You should benefit from the long-term return on your dollar – not the credit card company.

What can you do to change this around? One important step is to avoid the minimum payment trap. When you open your credit card bill do you look at the amount of the minimum payment to decide how much to pay? If so, you're falling into the minimum payment trap.

Why do we call this a minimum payment trap? Research by Dr. Neil Stewart in his article, "The Cost of Anchoring on Credit-Card Minimum Repayments," shows that people tend to pay less when they use the minimum payment as a payment guide.

Research participants were given a mock credit card statement. They were asked to consider how much they could afford to pay, and then to state how much they would pay. Participants saw either a statement that included a minimum repayment amount or an otherwise identical statement without this information.

Those people who saw a statement with a stated minimum payment chose to pay less than those who did not have the suggestion of a payment amount. How does this research help us? Next time your credit card bill arrives, decide how much you can afford to pay BEFORE you look at the minimum payment listed.

Ideally we would pay all of our credit card balance each month to avoid interest charges. Sometimes this is not possible. However, paying even a little more than the minimum required can make a big difference in costs over time.

As a result of the Credit CARD Act, your monthly credit card bill has new information on it. Have you noticed? Take a look – on your bill it states how long it will take to pay off your balance if you only pay the minimum payment. And, there is information about how much you need to pay each month if you want to pay your balance in three years.

For example, Susie has a credit card balance of $3,000 with an interest rate of 14.4%. With a minimum monthly payment of $90, it would take 11 years to pay off the balance. However, if Susie pays just $13 more each month ($103), the balance will be paid off in three years and $1,033 less will be paid in interest charges. This is $1,000 that Susie can invest for her retirement!

For more information about how to manage your credit cards, visit University of Illinois Extension's website, Credit Card Smarts. And, visit the Plan Well, Retire Well website to learn how to invest your money so that compounding returns help you!

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