The minimum payment on credit cards only keeps you in debt longer, costs you money in interest, brings many money worries and could hurt your credit score.
It is always good to keep a monthly budget of your income and expenditure to be in sound financial control, but it is a terrible plan to pay down your credit card and store card balances by making minimum payments for a longer time.
When you make only the minimum payment on credit cards, you are giving yourself temporary relief. However, you are also committing to paying more in interest and charges in the mid to longer term. That trade-off can get you into serious financial trouble over time, especially if your card charges a high interest rate.
If you make minimum payment toward your balance each month, here is what you can expect to happen:
- Paying down your debt will take much longer and eventually get you into debt problems.
- You will rack up higher interest and charges on your accounts.
- Your credit rating could affect your further lending prospects.
- Money matters will take their toll on your financial planning and management.
- Debt solutions may be needed, and money worries could affect your health.
Let us look at why.
It will take much longer to pay off your debts if you only make the minimum payment.
When you make a minimum payment on a credit card, you are telling your debt, “See you next month”
Credit card issuers tend to set minimum payment requirements at low levels. You will generally owe either a fixed amount of 5.00 or a percentage of the balance, whichever is greater. Some cards require you to pay only 1% or 2% of the balance each month, plus any fees and accrued interest. Making these small payments on time will let you avoid late fees, but you will not make any real progress on paying down your credit card balance.
If you pay to double the minimum payment, that repayment period is cut in half.
See how it affects you:
Look at the Minimum Payment Warning on your credit card bill. It includes a table that shows how much money and how many years you will need to pay off your balance if you pay only the minimum each month. You will significantly shorten that period just by paying more.
“If you pay twice the amount of the minimum, that repayment period gets cut in half”
As a debt advisor, I feel that banks should tell clients that there are options to pay full payment at the end of each month. Most of our debt solution clients have no idea about this option, which could save them a lot of interest and charges for missed payments or late payments.
We only notice the section of minimum payment requirement on credit and store card statements, which needs to change to reflect the option of full payment or more payment than the minimum payment each month on credit card balances.
You will rack up higher interest charges if you keep paying the minimum payments on credit cards
Unless you are using a 0% APR card, your interest charges will grow along with your balances. Make only the minimum payment and you will barely wipe out last month’s interest. In addition, if you keep charging items to the card, you will fall further and further behind.
“You pay, and you pay, and you pay, and you never pay it off.”
You are running on a debt treadmill if you only make the minimum payment.
See how it affects you:
To estimate your interest charges, divide your card’s annual percentage rate by 12 and multiply it by your average balance. If your card has a 21% APR, for example, your monthly interest rate would be 1.75%, or 21% divided by 12. Multiply that by the balance you are carrying. If you have a balance of, say, 10,000, you would owe about 175 in interest next month if you paid only the minimum now.
You can start next month with less debt by paying more against your balance.
Your credit could take a hit if you keep on making the minimum payments on Credit Cards
When your credit card balances increase, so does your credit utilization ratio, the percentage of the credit you are using. In addition, because your credit utilization ratio is a major factor in your credit score, high balances can badly damage your credit. That makes it harder to qualify for affordable loans and credit cards with the best terms. It can even affect your ability to find a job or rent a house, as employers and property owners commonly review applicants’ credit reports.
It is better to use less than 30% of your credit limit on any given card. If you can use less, that is even better.
“High credit utilization can even affect your ability to find a job or rent a house.”
See how it affects you:
To determine your ratio. If your debt is bumping up against your credit limit, focus on bringing down your balances as much as you can. If you feel squeezed for cash at the end of the month, try paying your credit card bill right after salary or income day. Alternatively, if you are able, volunteer for more shifts at work and put the extra cash toward your debt.
If you cannot afford more than the minimum, ask for help
Paying the minimum is better than adding up late fees, and because late payments can damage your credit score, paying at least the minimum is essential.
However, you should not do it forever. If your debt totals more than half your annual income, you cannot pay it off within five years, and it is a source of major stress in your life, you might want to consider suitable debt solutions.
Please call us for a free and confidential debt appointment on 0203 318 0990.
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