Making your credit card’s minimum payment is better than no payment at all. It’s also better than racking up late fees and falling behind. But if you’re looking to pay down your debt, paying the minimum card payment isn’t going to get you very far.
Paying just the minimum amount can cost you hundreds, possibly thousands of dollars in interest charges. Here’s why the minimum payment can cause major problems now and in the future.
It Will Take Longer to Pay Down Your Balance
Credit card issuers typically set very low minimum payment requirements. Why? So that they can make money off fees and interest charges.
Most issuers will ask for a fixed amount, such as $25 or $30 a month, or a set percentage of the balance, whichever amount is greater. There are also cards that only require you to pay as little as 1% of the balance, plus fees and accrued interest.
While these are great options if you’re in a financial bind and need to put money towards other expenses, paying the minimum card payment is not a smart long-term solution.
Look at the “Minimum Payment Warning” on your monthly statement. These numbers show how much interest you’ll pay and how much time it will take to pay off the current balance if you pay just the minimum.
If you’re serious about paying debt and minimizing interest paid, pay more each month. Paying twice the minimum amount cuts the repayment period in half.
More Money Towards Interest
Unless you have a 0% APR card, interest is tacked onto your running balance. By making just the minimum payment, you’ll find that the amount is barely enough to cover last month’s interest. You’ll see little to no change to the principal balance.
The cycle of just paying interest fees becomes even worse if you continue to charge items to the card. The end result? You fall further behind and owe even more interest.
By paying just the minimum amount, you’re taking two steps forward and one step back.
Your Credit Score May Drop
When your credit card balances increase, your credit score may drop. This is because your credit utilization ratio increases. Ideally, this ratio should be no more than 30% of the credit limit on the card.
Credit utilization is a major factor in determining your worthiness as a borrower. This means that keeping high balances by paying just the minimum card payment could cause your score to drop.
Having a low credit score:
- Makes it harder to qualify for loans
- Means higher interest rates for future loans or credit cards
- Could affect your ability to find a job
- Could impact your ability to rent a home
The best way to protect your credit score is to pay more than the minimum payment and to avoid getting into further credit card debt.
The Minimum Means Major Problems
The real cost of paying just the minimum card payment is a hefty one. Depending on your balance and interest rate, you could be throwing away hundreds, maybe even thousands of dollars towards interest charges.
Take control of your finances and get serious about paying down debt. Pay as much as you can on your highest interest card, and then move on to other debt. Check options to gain sustainable money from home. The less debt you have, the more financially independent and secure you’ll be.