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Why It’s Important to Make More Than The Minimum Payment

minimum payment

Making the minimum payment 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 how much you actually owe. But making only the minimum payment time and again is a bad habit that can hurt you financially. Here are some reasons it’s important to pay more than the minimum whenever possible.

How Making Minimum Payment Can Hurt You Financially

It Takes Longer to Pay What You Owe

When you make only minimum payment, it is primarily going towards interest, and most of your balance remains unpaid. If you do this repeatedly, you chip away at your debt in very small increments, and it can take years to bring it down to zero.

For example, suppose you charge $1500 to a card with an annual interest rate of 18 percent and a minimum payment of $30. If you pay only the minimum, it will take you 7.8 years to fully pay off the debt. If you pay $50 per month instead, you cut the time to repay that debt down to 3.4 years. A $100 monthly payment means you will pay off the debt in only 1.5 years.

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 make only the minimum payment, you ultimately pay more than you owed originally.

In the example above, a minimum payment of $30 will result in your paying a total of $1293 by the time you finish paying. This is almost as much as your original balance! A $50 per month payment reduces your interest payment to $507. And a $100 monthly payment means you will pay only $212 in interest by the time you finish paying. That’s a lot of savings!

You Have Less Available Credit

Carrying a balance on your card leaves you less available credit. Carrying a balance can put you at risk of hitting your credit limit and reducing your credit score because you appear to be over-extended financially. Experts recommend that you should aim to carry a balance of no more than 30% of your credit limit to optimize your score. The total amount you owe on your credit cards relative to your credit limit factors in as roughly 30% of your FICO score, so it’s important to consider.

Credit Card Payment Best Practices

Ideally, you should pay your full balance each month. Paying in full allows you to avoid any interest accruing on your balances. A strong payment history is optimal for your credit health.

That said, for many of us, paying off your balance every month is not always possible, especially when an unexpected large expense comes up in an emergency. If that happens and you can’t pay your full balance, don’t just settle for the minimum payment. Try to make a large payment the first month and pay the remainder as soon as you can. At the very least, pay as much as you can comfortably accommodate above the minimum payment to avoid high-interest charges accruing. Making the minimum payment is better than accumulating late fees and damaging your credit by not making timely payments.

If you are experiencing financial difficulty and are looking for a solution, CESI is here to help. Our counselors are available to assist you. Contact us today for a free financial assessment with one of our certified credit counselors.

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