Paying the Minimum Payment on Your Credit Card Does Nothing

By on May 15, 2013 No Comments

It’s a situation that’s easy to get into: “I’ll just make the minimum payment on my credit card this month and worry about paying off the balance later.” While this can sometimes work as a very short-term solution to a debt issue, this type of philosophy usually gets people into more trouble than it saves them. Here are the top reasons why making the minimum payment on your credit can have negative effects now, a few months from now, and even several years down the road.

Minimum Payments Don’t Help You Avoid Interest Fees

The first way that you’ll get hit by minimum payments is through interest fees. Even though minimum payments will leave you with more money in the bank right now, you’ll end up paying way more for the goods and services you originally bought in the long run because of the interest that credit card companies add to your unpaid balance. Imagine a credit card bill of $1,000. If your minimum payment were 3%, then you would only spend $30 a month to pay this bill off. But in order to pay it off this way, you would face interest fees that climb to more than 20%. Even at an interest rate of 14%, it would take you more than six and a half years to pay off a $1,000 bill and cost you $455.04 in interest charges. That means that what you pay in interest would be almost half as much as what your original bill cost. And the higher your bill is, the more interest you’ll end up paying.

Minimum Payments Hurt Your Credit Score

While making minimum payments won’t directly affect your credit score, there is a danger in having a high balance on your card relative to your spending limit. Here’s how it works: The more unpaid balance you build up on your card, the lower your credit limit will be, and this ratio can affect your credit score. That’s because the longer it takes you to pay off your balance, the less your credit card company will trust you to make payments on future purchases. As a general rule, if your balance is more than 30% of what your credit limit is, then your credit score can be negatively affected. This can be bad news down the road if you’re hoping to take out other loans such as lines of credit, student loans, and mortgages.

In order to pay down your credit card in the most cost-effective manner, the best solution is not to make minimum payments, but to pay as much as you can each month in order to get rid of the balance as soon as possible. But don’t worry; if you’ve already been making minimum payments, it’s not too late to change. The first thing you will need to do, if you haven’t done so already, is to stop spending on your credit card so you don’t end up with an even higher balance (and more interest charges). Then, challenge yourself to pay higher than the minimum every month. You can even make payments twice a month or even once a week if that makes it easier for your budget. Once your balance starts going down and you start paying less in interest fees, you’ll find it much easier to pay off your balance and get to the point where you can pay off your credit card bill in full every month.



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