When it comes to making payments on your credit card balance, mortgage, or auto loan, it can be tempting to only pay the minimum monthly payment. After all, it’s the smallest amount you can pay, and it means you won’t have to pay any late fees. However, only paying the minimum on your monthly payment can actually be a bad idea in the long run.
What is the Minimum Payment?
The minimum payment is the lowest amount you can pay on your credit card balance each month to avoid late fees and penalties. It’s usually calculated as a percentage of your balance, usually around 2-3% of the total amount owed.
So why is paying the minimum payment a bad idea?
Paying only the minimum payment may seem like a good idea because it’s an easy way to avoid late fees, but it can end up costing you a lot more in interest charges over time. Here are some reasons why:
It Takes Longer to Pay Off Your Balance
If you only pay the minimum payment on your credit card each month, it will take you much longer to pay off your balance. This is because a significant portion of the minimum payment goes towards paying off interest charges, rather than the actual balance owed. As a result, it can take years to pay off your debt.
You Pay More in Interest Charges
Since a large part of the minimum payment goes towards paying off interest charges, you end up paying much more in interest charges over time. The longer it takes you to pay off your balance, the more interest you’ll end up paying.
Your Credit Score Can Be Negatively Affected
Paying only the minimum payment on your credit card each month can also affect your credit score. Credit utilization, or the percentage of available credit you’re using, is a key factor in determining your credit score. If you’re only making the minimum payment, your credit utilization will be higher, which can lower your credit score.
What Should You Do Instead?
To avoid the negative consequences of paying only the minimum payment, you should aim to pay more than the minimum payment each month. Even if you can only afford to pay a little more, it can make a big difference over time. Here are some tips to help you pay off your credit card balance faster:
Set a Budget
To make sure you can afford to pay more than the minimum payment, set a budget and track your expenses. This will help you identify areas where you can cut back on spending so you can put more money towards paying off your credit card balance.
Prioritize Your Payments
If you have multiple credit card balances, prioritize your payments by paying off the highest interest rate balances first. This will help you pay off your debt faster and save money on interest charges.
Consider a Balance Transfer
If you have a high interest rate on your credit card balance, consider transferring the balance to a card with a lower interest rate. This can help you save money on interest charges and pay off your balance faster.
Here is How Paying a Little More Can Help You Get Out From Under Your Debt
By paying even a little more than the minimum payment, you can significantly reduce the amount of interest you pay over time. Any extra amount you pay goes towards reducing the principal amount owed, which, in turn, lowers the amount of interest you will pay in the future. As a result, you can save money and get out of debt faster.
For example, let’s say you have a credit card with a $5,000 balance and an 18% interest rate. The minimum payment is 2% of the balance, or $100. If you make only the minimum payment, it will take you over 16 years to pay off the balance, and you will pay a total of $8,399 in interest.
If you increase your payment to $150 per month, you will pay off the balance in just over 3 years and save over $5,000 in interest. By paying an extra $50 per month, you can save thousands of dollars in interest and get out of debt much faster.
Paying only the minimum payment on your credit card balance may seem like a good idea in the short term, but it can end up costing you a lot more in the long run. By paying more than the minimum payment each month, you can pay off your balance faster and save money on interest charges.
