Making only the minimum payment on your credit card every month is a good idea to avoid missed payments and paying late fees. Still, it is one of the biggest traps for anyone who wants to keep their credit score high and avoid extra charges on the credit card.
If you’re reading this article, there is a chance that you have a credit card. And if you’ve gotten that far, it probably means you know how to manage those credit cards responsibly, right?
After all, what could go wrong with a seemingly full-proof system for spending money and then paying it back in small instalments over time? The answer — quite a lot.
Are you among those who think “minimum payments” are another way of saying “cheap monthly instalments”? Think again!
What is a minimum payment?
The minimum payment on a credit card is the smallest amount you must pay each month to keep your account in good standing. The bank will then add the rest of the money to the amount you owe to your account, along with an extra interest charge.
The minimum payment is calculated based on the debt you owe when you make your payment. The minimum amount depends on your credit card issuer. The minimum payment on your credit card bill is the least amount you have to pay every month.
Usually, the minimum payment is around 2% to 3% of the borrowed amount. Typically, the minimum due amount on the credit card is significantly lower than the outstanding monthly amount on your credit card.
If you make only the minimum monthly payment on your credit card each month, you may be able to avoid late payment fees, but you will end up paying more amount of interest on the outstanding.
To pay off your account faster, you must make larger payments than the minimum amount.
Why making only the minimum payment on your credit card is bad?
Making only the minimum credit card payment for a few months if you’re experiencing a financial emergency can save you money in the short term. However, it will not give you peace of mind in the long run as you will only be piling up your credit card debts, not paying the full balance.
Credit card companies charge higher interest rates on outstanding credit card statement balances every billing cycle.
While you’re paying off your debt, your credit card company is earning interest on the amount you owe them. And the more time you spend paying back your debt, the more you’ll pay in interest. If you make only the minimum payment on your credit card every month and keep the card open, you’ll be paying off your debt slowly – and paying a lot extra in interest.
On the other hand, if you close your credit card accounts and pay off your debt as quickly as possible, you’ll save yourself a lot of money. If you plan on keeping your credit cards open, the best way to manage your debt is to pay more than the minimum payment amount.
The cycle of constantly paying only the minimum
If you’re only making the minimum payment on your credit card each month, then you’re likely in a position to pay interest on your debt for as long as it takes to pay it off. This means it will take much longer to pay off your debt than if you would make larger payments.
You’ll pay your credit card company less than what you owe every month if you opt for the minimum payment. This means you’ll rack up a lot of debt, and you won’t be able to pay it off quickly. Every month, you make a small payment that barely covers the interest you owe on your debt. As a result, you’ll be paying interest on top of interest.
What happens when you only pay the minimum?
It all starts with a seemingly harmless mistake – you forgot to pay your credit card bill on time, or you were running with a tight budget to pay it in full. So, you make the minimum payment on your credit card and go on your way. You may forget to pay the bill again, or your forgetfulness may be due to a financial emergency. Whatever the reason, you find yourself in the same situation again.
If you keep making the minimum payment on your credit card, you will likely be stuck in a destructive debt cycle. Your debt will grow, and you’ll be unable to clear it off your credit report. Your credit score could be taking a hit, too.
3 Steps to Taking Back Control of your Credit Cards
If you’re one of the millions of Americans struggling with credit card debt, you’re not alone. According to a recent report, nearly one in three American adults have delinquent debt, and the average household owes almost $7,000 in credit card debt every month.
Getting caught in a cycle of interest charges and minimum monthly payments can be easy, especially if you miss a due date. However, there are steps you can take to get back on track.
First of all, know your credit score. Review your credit report regularly and monitor the credit utilization ratio. The higher the percentage, the worse it is for your credit rating. The credit card utilization ratio is the sum of your current balance divided by the credit limit of your credit card.
This will give you an overview of your current debt situation and help you identify any areas where you may fall behind.
Next, know your interest rate and how it applies to you. Familiarise yourself with the interest rates and minimum monthly payments for each credit card. Accordingly, prepare a monthly budget and stick to it. This will save you from being surprised by high-interest charges.
Finally, make a solid plan to repay the debts as quickly as possible. This may involve transferring the credit card balance to a lower-interest card or making extra monthly payments. Make all your payments on time and in full. If possible, make an additional payment to reduce the current balance and save some money on interest. Set reminders for yourself or automate your payments, so you never miss a due date.
By taking these steps, you’ll surely be on your way to taking control of your credit cards. Be mindful to take control of your credit cards and improve your financial health.
How Is the Minimum Payment Calculated?
The minimum payment is calculated by taking the card’s total balance and dividing it by the number of months in the introductory 0% APR (Annual Percentage Rate) period. This minimum payment is required to maintain your 0% APR.
The minimum payment on your credit card is calculated by adding up all the debt you owe on all your credit cards and then applying a percentage to that amount.
That percentage is often 2% to 3% of the total debt you owe on all your credit cards. The minimum payment can vary depending on which card company you’re dealing with.
A credit card is for your convenience, not to create a debt trap. So, paying minimum payments on your credit card will not help you pay off the outstanding debt; it will only deteriorate your credit score. Mismanaging credit cards can cause people to become trapped in a cycle of debt.
If you make only the minimum payment on your credit card each month, it will take longer to pay off your debt and make you pay a lot in the form of interest. Do you want to avoid getting trapped in the cycle of debt? Then ensure you track your spending, prioritise your debt, and plan to pay down your credit card bill in full every month.