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Effect of Making the Minimum Payment on Your Credit Card

Effect of Making the Minimum Payment on Your Credit Card

It is glaring that the lesser you pay, the longer you remain in debt. Besides, bear in mind that the interest of the debt keeps growing, and your credit score also takes a blow. 

If you are on a budget, spending as little as possible is good advice. It, however, makes no sense when you have credit card debts to pay.

While the minimum payment will give you temporary relief, the debt keeps accumulating because the interest increases. If your credit card charges an alarming interest, this can get you in a horrible financial mess over time.

This is a projection of the effect of paying the minimum balance every month

Longer time to pay your debt 

Intentionally paying the minimum amount on your debt is like telling your debt, "I'll be back next month." Most times, the minimum requirement set by credit card issuers is usually at the barest minimum. Generally, you get to owe, either a fixed amount (most times, 25%) or a percentage of the balance. For some card issuer, all you have to pay is 1 or 2% of the balance per month with interest and any accrued fees. If you can make this payment, you will avoid late penalty charges, but you will make no real progress on getting your debt off the way.

On every credit card bill, there is a "Minimum Payment Warning," where you can deduct how it affects you. This is a table that reveals the amount you owe and how long you need to pay up if you pay just the minimum amount. Paying twice the minimum amount reduces the projected time by half.

Possibility of Huge Interest Charges

There is a big chance that your charges keep growing with your balance, except your card is 0% APR. Making the minimum payment alone might not even cover the previous month's balance. It gets worse if all your purchases are charged to the card. You will keep making the minimum payment with no end in sight.

You can deduce your interest rate and determine how it affects you. Get your card’s annual percentage rate and divide it by 12. Multiply this by the average balance. A card with a 23% APR, for instance, will have an interest rate of 1.94% (23% divided by 12). Now multiply this by the balance on your card. A person owing $15,000, for instance, will have an interest amount of $291 by making the minimum payment only. 

Now you understand how paying more reduces your debt.

Your Credit Score Suffers 

As your credit card balance rises, your credit utilization ratio (percentage of your credit you use) also increases. One of the critical factors that affect your credit score is your credit utilization ratio. As a result, when your balance climbs, it damages your credit. The implication of this is glaring: You will not be able to qualify for loans with good terms. Some employers and landlords review applicant's credit; hence the ability to get a good job or rent an apartment reduces significantly.

As an idea, use no more than 30% of your credit limit on any card. Do all in your capacity to reduce your monthly balance. Try and pay your credit card bill right after collecting your wages. If possible, do overtime and use the extra cash to service your debt. Your effort will pay off in the long run.

Concluding Remarks

There are times, however, that one might be genuinely unable to afford more than the minimum. In times like this, asking for help is recommended. Of course, it is better to pay the minimum than paying nothing at all and accumulating a late penalty fee, in addition to damaging your credit score.

Making the minimum payment, however, should not be your priority. If the total debt you owe is more than half of your annual income, paying this in the next five years is near impossible. Yet, debt is a significant source of stress for many people.

Consider getting creative by reducing your spending or getting other jobs to service the debt. It will work out for you in the long run. All in all, you have to deal with your debts now, or it can ruin your future.

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