I’ll pay more next month…
When creating a budget, you’re told to keep your expenses as low as you possibly can, and it’s good advice. Unless of course you’re making credit card payments. Most people are tempted to make the minimum monthly payment on their credit card in an effort to offset other bills. In the long run this is an extremely costly mistake.
We’ve all been there. We make the minimum monthly payment on our credit card to avoid delinquency and tell ourselves, I’ll pay more next month. But, we end up putting ourselves in more long term credit trouble by doing this. This is because depending on your credit, most times the minimum payment barely covers the interest rate. You’ll find yourself accruing more interest on your balance than your minimum payment can keep up with.
Simply put, if you pay the minimum now, you will have to pay more later. Eventually, your minimum monthly payment will rise. Once the minimum payment exceeds what you can afford, you’ll find yourself making delinquent payments, the very thing you tried to avoid.
Reasons you should avoid minimum monthly payment
It will take you longer to pay off your credit
Finance website NerdWallet crunched the numbers and did the calculation on how long it will take you to finish paying your credit if you consistently pay just the minimum monthly payment. The amount used is $6,081, which is the average credit card debt for the a household in America. This is what they found out:
- If you pay the monthly payment only, it will take you 169 months (or 14 years and one month) to pay off the credit debt
- If you pay twice the minimum monthly payments, it will take you 65 months (or 5 years and five months) to finish the payment.
Note that these results do not show how long you will have to pay if you keep adding debt to your credit card every month, which is a common scenario.
You will accrue more interest
By dividing your Annual Percentage Rate (APR) by 12 months, you get your interest rate every month. That number multiplied by your balance will give you the interest payment you have to make every month to keep up. If you do this calculation, you’ll see that by paying just your minimum monthly payment every month, most (sometimes all) of your payment is going directly to interest.
Your credit score will take an eventual hit
While paying just the minimum is better than delinquent payments, it has its own problems. Eventually, it gets to a point when your debt will be more than half your yearly income. This is when consumers should consider other options such as the variety of debt relief methods, or in extreme cases, bankruptcy. Doing this will affect your credit score and it will take some time to bounce back.
In all you do, try to pay at least the minimum on your credit debt, but don’t do it for too long. It may feel like a short term relief to make a small payment, but remember how much it’s costing you down the road when you do this. Future you will past thank you.