Applying Credit Card Payments to the Principal Balance?

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Recently, we received the following question from one of our readers:

"If I pay more than the minimum payment on a credit card, will the additional money go towards the principal?"

This is a common question that people often ask when looking for the most effective method for paying down credit card debt. To answer this question, you need to know how often the interest accrues on the balance. Credit card issuers will usually only advertise the APR (annual percentage rate) on the credit card, which is approximately the rate of interest that would accrue over the course of one year. For example, if you have a $100 balance on a card with an APR of 10%, you can expect a little over $10 in interest to accrue in one year. However, most credit cards today accrue interest on a daily basis, so in reality, the interest is accruing at about 0.00027% per day, making it almost impossible to evade interest by paying down the interest before the bill comes due.

The best way to gain traction when paying down credit cards is to, first of all, stop using the card. You can't dry yourself with a wet towel, likewise, you cannot pay down a credit card while continuing to use it for purchases. Secondly, you have to pay much more than the minimum balance each month. If you look at the monthly credit card statement, you can see how much interest was added to the balance over the course of the previous billing cycle. In order to make progress, your payment needs to be, at the very least, higher than the finance charges, otherwise, your bill will continue to grow each month.

If you have credit card debt, and are looking for a way out, the Wealth Education Exchange is here to answer your questions and provide a clear path to freedom from parasitic debt.