Payment options for a Line of Credit
There are three different types of lines of credit and payment options can vary between these three. This can be important for you to think about when looking at which of these different lines of credit my best fit your particular financial scenario.
Most signature lines of credit have a payment based upon a percentage of your current balance. The figure is usually set at two percent or two and a half percent of the outstanding balance. Let’s use an example to illustrate this point. Think about the fact that you spent $1000 buying a new TV the last month. When the bill comes, you are given two different options: make the minimum payment or any amount greater than the minimum payment.
Minimum payments have been calculated based upon the percent of whatever the new balance is. As was mentioned with the $1000 TV, 2% of your outstanding balance would be $20. This would be the minimum payment. Most of the payment will go towards paying the interest which is charged every month. If you make the minimum payment, it often can take you many years, to get your debt paid off. This explains why the recommendation was given that you should pay more than the minimum payment.
If you make a payment of $200 that first month, your outstanding balance of $1000 is reduced to $800. The amount of interest you pay every month is contingent upon the outstanding balance. A good rule of thumb then emerges that you should pay as much of the principal down a month without completely sacrificing your lifestyle. This reduces the amount of interest you have to pay when buying things.
Some lines of credit have an interest only option. This is determined based upon the number of days in your billing cycle, your current outstanding balance, and the interest rate that you are paying.
Remember that you want to check out your payment options so that you can include this within your monthly bills easily.