Credit Card Debt

Credit Card Minimum Payments Could Be a Trap

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If you’re on a tight budget and faced with heavy debt, you may be tempted to make only the minimum payments on your credit cards—but that could be a huge mistake. While paying the minimum amount keeps your account in “good standing,” it won’t move you much closer to being debt-free. Before you pay the minimum on your next credit card bill, think about this.

1. It Could Take You Decades to Get Out of Debt

Making the minimum payments each month may seem like a good way to spread out the cost of your purchases over time, but it could keep you underwater for much longer than you’d expect. The brutal nature of debt is that unless you stop using your cards, you could just keep adding on new debt as you try to pay off your old ones.

Now tack on the high interest charges to what you already owe, and your debt could set you back even further. Interest accrues and compounds on top of itself each billing cycle, and the longer you leave it unpaid, the harder it becomes to pay it off. That means there’s a real chance that you’ll be paying your credit cards for many years to come!

Let’s say you owe $18,000 and have an average interest rate of 16.86% APR. If you only make minimum payments, you could end up paying over $15,000 in interest alone over the 22 years and 4 months it takes to pay off the debt.1  Of all the debt relief options, the minimum payment method will surely keep you in debt the longest.

2. You’ll Pay Thousands of Dollars in Interest Alone

Ever wonder why credit card companies are fine with recouping only a small portion of your total balance every month? The reason is because the interest fees are such a big source of profit for them. In fact, the longer it takes you to pay off your balance, the more money they’ll collect.

People who carry a balance typically have high interest rates, and the money you put towards making minimum payments will largely go towards interest fees. You’ll barely chip away at your original debt and end up wasting thousands of dollars in the end.

3. Your Credit Score Isn’t Safe

Many people falsely assume that if you keep up with your monthly minimum payments, your credit score will be protected—but that’s simply not true. When it comes to your credit score, 30% of it is determined by your credit utilization ratio, which is the amount of credit you are using divided by your credit limit. The closer you are to maxing out your credit card limits, the higher your credit utilization ratio. A higher credit utilization ratio could really drag down your credit score.

If you continue to make only the minimum payments on your credit cards while racking up new charges, your credit utilization ratio will remain high and your credit score could suffer as a result.

There Are Affordable Ways to Make Real Progress on Your Debt

Making only minimum payments could keep you buried in debt for a long time. If you truly want to get rid of high-interest debt, there are plenty of effective solutions that might not cost you much more than your minimum payments.

The debt snowball method is a do-it-yourself option that could help you get out of debt faster. Here’s how it works: you start with the card that has the smallest debt amount and pay as much as you can on it each month until it’s paid off (keep paying minimums on the other cards). Then, you move onto the card with the next largest balance and do the same thing. Do this over and over again until all your cards are paid off. The logic with the snowball method is that by getting small victories up front, you will stay motivated to tackle all your debts. For this method to succeed, you also need to resist using the cards you are trying to pay off.

If you’re struggling with more debt than you can handle on your own, another popular option is getting help from a credit counseling agency. These non-profit organizations could help you find ways to save money and take steps to reduce your debt. They may even offer to enroll you in a Debt Management Program where they will negotiate reduced interest rates with your creditors so that you have an easier time paying off the debt.

Regardless of why you are only making minimum monthly payments, there are many ways to get out of debt. Learn more about faster, more affordable debt relief options now and find out which solution might be right for you.

Sources

  1. Assuming the minimum payment is 3% of the total debt.

Tammi Huang is a Marketing Manager at Freedom Financial Network. Her goal is to help people adopt better money habits and improve their financial health. She wholeheartedly believes that spending less doesn’t mean living less. When she’s not writing, Tammi fills her free time working on home design projects, trying new restaurants, and exploring dog-friendly spots with her rescue pup.