You have probably noticed by now that when you get your credit card bill each month, it does not read like all the other bills you receive, like utility, gas, cable, and others that have a total due amount. Your credit card bill comes with a minimum payment amount in addition to your outstanding balance.
While the outstanding balance might be a little more than you want to contemplate paying at the moment, the minimum amount may be no better. In fact, it can cost you a great deal more if you pay only the minimum balance for an extended period.
What is a Minimum Payment?
The minimum payment amount is the absolute minimum amount of money the credit card will accept to consider your obligation to them, for the indicated term – usually a month, satisfied. According to All Financial Matters, the minimum payment is typically two percent of the outstanding balance, although that may vary by card issuer. At a minimum, it should cover accrued interest charges for the month. Card issuers also typically have a minimum dollar amount payment, of say $25 if the alternative minimum payment would fall below that amount.
Benefits of Minimum Payments
Credit card companies did not have nefarious intentions in mind when creating minimum payments. In fact, they were a bit of a boon to consumers who may need a little more flexibility in their payment requirements.
Some months the gas bill can be higher than others, or there may be unexpected car repairs that come up. Having the ability to pay only the minimum payment in these rare months is a great thing for consumers who may be establishing themselves and just getting started on their savings plans and rainy day funds.
The problem arises when you rely solely on making minimum payments without making headway on the actual debt.
Impact of Making Only the Minimum Payment
As the saying goes, “It is a trap!” One that can keep you buried in debt and paying interest on your credit card debt – while barely touching the actual balance due month after month after month. This can occur even if you never make future charges on your credit card.
The minimum due payment is not evil by itself, it was created with good intentions. Unfortunately, it has become far too great a temptation for many consumers who consistently pay only the minimum balance. That is when it becomes a trap – one that ties you to debt and the credit card issuer for many more years than necessary.
Credit Donkey explains by paying only the minimum balance on a $14,718 debt with a 13.04 percent APR, it would take 31 years to pay off the full debt. In the process, you would pay well over $16,000 in interest (remember the balance owed on the credit card is a little less than $15,000). If you increase the monthly payments to $300 per month, you can reduce the payoff time to only six years paying only $6425 in interest. Adding one dollar more per month reduces the total interest payments by $35. Ten extra dollars per month an extra $333. Doubling the payments to $600 per month allows you to pay off the debt within two years and reduces the total interest payments to only $2,493. As you can see from this example, the difference is substantial.
Plan to Pay Off Your Balance
The best scenario is one in which you pay off your balance each and every month. It minimizes the amount of interest you will pay while allowing you the flexibility credit cards represent.
Barring that, because sometimes, it is just impossible to do in one fell swoop, create a plan in which you make significant progress toward paying off the balance each month. Give yourself a deadline for paying off the balance and determine how many months it will take (keeping in mind interest accrues and grows with each passing month).
Making minimum payments on your credit card can be tempting – especially when life takes you by surprise. Try to keep the minimum payment months to a minimum and pay as much as possible whenever possible. In the end, this will let you enjoy an impressive reduction in the total amount you will wind up paying for those items you have charged.