Paying the minimum on your credit card each month may seem tempting because the minimum is usually a small fraction of what you owe. It’s easy to pay the minimum required and to lose sight of the full amount due. But making nothing more than the minimum payment time and again is a bad habit that can hurt you financially. Here are some reasons you don’t want to pay just the minimum and what you should plan to do instead.
It Takes Longer to Pay What You Owe
When you pay the minimum, most of your balance remains unpaid and carries over to the next month. If you pay the minimum repeatedly, you chip away at your debt little by little, and it can take years to finally bring it down to zero.
For example, suppose you charge $500 to a card with an annual interest rate of 24 percent and a minimum payment of 2 percent or $20, whichever is higher. If you pay only the minimum, it will take you three years to fully pay off the debt.
You Pay More Interest
Because it takes so long to pay off your balance when you’re paying the minimum on your credit card, interest builds up longer. Credit card companies set the minimum low to maximize the interest they earn on your account. When you pay the minimum, you ultimately pay more because you owe a hefty amount of interest on top of your original charge. In the example above, you would end up paying over $200 more than the initial amount you charged.
You Have Less Available Credit
Carrying a large balance on your card leaves you less available credit. That can be inconvenient if you want to use your card for another purchase soon. It also puts you at risk of hitting your credit limit and getting charged expensive fees.
What You Should Do Instead
Ideally, you should pay your full balance each month. If your credit card offers a grace period of a few weeks, paying right away allows you to avoid owing interest. Even if your card doesn’t have a grace period, paying promptly is the best way to avoid fees and keep the interest due very low.
Paying off your card every month is not always possible, especially when an unexpectedly large expense comes up in an emergency. If that happens and you can’t pay your full balance, don’t settle for the minimum. Try to make a large payment the first month and pay the remainder as soon as you can.
For example, you could pay 75 percent of your bill the first month, then pay the remaining 25 percent plus interest the following month. Even if you feel you must take several months to pay off your debt, paying more than the minimum is always better. So you could plan to pay your minimum plus an addition $100 each month until your card is paid off. That shouldn’t be your first choice because you owe interest for each additional month your card has a balance, but it is still less expensive than paying only the minimum.
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