Is The Minimum Credit Card Payment Enough?
When it comes time to pay your credit card bill, how much do you send it? Some people may say that paying the minimum keeps you in good enough standing – and that’s true, to a point.
But while paying the minimum does keep you in the realm of “on time payments” it doesn’t lower your balance very much at all and could be costing you way more than you realize in interest every year.
It’s tempting to send in the minimum monthly payment (often $15 to $25) when you’re under financial duress.
Don’t do it.
Not only will you never pay off your bill, but the interest rates that credit card companies charge will actually keep your bill growing every month. Instead, send as large a payment as you can afford. Where possible, reduce your spending in other areas to focus on paying off your credit card debt. It might be worth going without extras like cable television or new clothes for a while if it means you can sleep easier at night knowing that you’ll soon be free of debt.
It may not feel like you’re saving money when you increase your credit card payments, but you are. Depending on your interest rate, you’re saving an average of 10 to 29% per year in interest on any balance that you manage to get off your cards. That means that if you pay off an extra $1,000 this year, you’re actually coming out $160 to $290 ahead, depending on your interest rate. If you’re already in debt, chances are money is tight for you, so freeing up this extra money can really start to give you some breathing room in the long run. Whether you use this money to accelerate your debt payments further, start an emergency fund, or invest in your retirement, the power of compound interest will start working for you instead of against you.
– via Investopedia
What Will Happen?
So let’s say you ignore the warnings and just stick with your minimum credit card payment – what happens?
Here are two potential consequences of sticking just to your minimum payment. Doing this one month may not be a big deal, but making it a habit could do more harm than you expect.
You’ll rack up bigger interest charges
Unless you’re using a 0% APR card, your interest charges will grow along with your balances. Make only the minimum payment, and you’ll barely wipe out last month’s interest. And if you keep charging items to the card, you’ll fall further and further behind.
“You’re running on a debt treadmill if you only make the minimum the payment,” Mierzwinski says. “You pay, and you pay, and you pay, and you never pay it off.”
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% / 12. Multiply that by the balance you’re carrying. If you have a balance of, say, $10,000, you’d owe about $175 in interest next month if you only paid the minimum now.
You can start next month with less debt by paying more against your balance.
Your credit could take a hit
When your credit card balances climb, so does your credit utilization ratio, the percentage of your credit you’re using. And 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 an apartment, as employers and landlords commonly review applicants’ credit.
It’s best to use less than 30% of your credit limit on any given card. If you can use less, that’s even better.
See how it affects you: Determine your credit utilization 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 payday. Or if you’re able, volunteer for more shifts at work and put the extra cash toward your debt.
– via NerdWallet
Do you carry a balance on your credit cards, or pay them off completely each month?