Your monthly credit card billing statement includes a payment due date and a minimum payment amount. This minimum credit card payment is the amount you must send to your credit card issuer to avoid defaulting on your credit card payment. Sending less than the minimum payment is just like paying late and results in all the same penalties as a late payment – a late fee and an increased interest rate.
Credit card minimum payments are typically between 2% to 5% of your credit card balance. On a credit card with a $1,000 balance, your minimum payment will be anywhere from $20 to $50. Even though paying the minimum payment might be convenient, it’s not the best way to pay off your credit cards for several reasons.
Paying the Minimum Takes Longer and Costs More
When you make minimum payments on your credit card, you’re only making small dents in the balance. It’s like moving a mound of sand using only a spoon. It will take a very long time. For example, if you make minimum payments on a $5,000 credit card balance (with an 18% interest rate) it will take you 23 years to pay off your credit card balance.
The reason that minimum payments don’t do much for your credit card balance is because most of the payment goes toward the monthly finance charges. So your balance goes down, very slowly. The higher your balance and interest rate, the longer it takes to pay off your credit card with minimum only payments.
In the 23 years you spend paying off your $5,000 credit card balance, you will end up paying more than $13,000 in total (with an 18% interest rate). That’s more than double the amount of the original balance. You’ll end up paying more than $7,000 in interest alone.
If you doubled your minimum payment and paid $250 toward your credit card balance each month, you’d pay off the balance in 2 years and only pay $989 in interest. You save more than $6,000 sending just $125 more each month. Think of all the things you can do with an extra $6,000.
Your Credit Card Balance Could Go Up
In some situations, your credit card balance could go up instead of down when you’re making minimum only payments. That can happen when you have a high interest rate and a low minimum payment. For example, if you have a $1,000 credit card balance at the default rate of 30% (the rate charged when you make a late payment or exceed your credit limit) and a 2% minimum payment, your finance charge would be $23 while your minimum payment would be $20.
When your minimum payments don’t cover interest, your balance goes up and so does your interest charges. This type of situation makes it impossible to pay off your credit card balance. You must pay more than the minimum to get your credit card balance to go down. Pay attention to your billing statement, especially your finance charge and minimum payment to see if you’re in this minimum payment trap.
Your Credit Score Could Suffer
If your credit card balance is high compared to your credit limit, making minimum payments is probably hurting your credit score. Part of your score is based on your credit utilization, the ratio of your credit card balance to credit limit. Low credit card utilizations are better.
Keeping your balance below 20% of your credit limit is best. If you’ve already exceeded that 20% credit utilization and you’re only making minimum payments on your credit card, it will take a long time for your credit score to recover. In the meantime, you have new applications for credit cards and loans denied because of your high credit card balances and low credit score.
Calculate Your Minimum Payment Timeline
If you want to get a rude awakening about how much minimum payments are costing you, use an online credit card payment calculator. These calculators tell you how much interest you’ll ultimately pay and how long it will take to pay off your balance when you pay the minimum only. You’ll also be able to compare minimum payments to a higher, fixed monthly payment to see how much money and time you’ll save by increasing your monthly payment.
- Bankrate
- CreditCards.com
- Dinktown.com (lets you compare minimum payments on multiple credit cards)
Is It Ever Ok To Pay the Minimum?
You may have an excuse to make minimum payments on your credit card if you’re working on a debt repayment plan where you focus on paying off one credit card at a time. With this type of credit card payoff you send a large, lump sum payment to one of your credit card until that card is completely repaid. Meanwhile, you send the minimum payment to all your other credit cards. Then, once one credit card is repaid, you begin making lump sum payments to another credit card.
Making the minimum payments in this situation is ok because you’re actively working to pay off your credit card debt. In any other situation, minimum only payments will prove to be expensive, time-consuming, and detrimental to your credit health.
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