What Happens When You Pay Minimum due on Your Card?

What Happens When You Pay Minimum due on Your Card?

It can be tempting to pay only the minimum payment on a credit card, but this isn’t always a good financial decision. Paying the minimum payment each month allows one to avoid late fees and keeps their credit in good standing, but that is all it does. It doesn’t help anyone get ahead financially. In fact, it can drastically set one back. The minimum payment is good in an emergency when one needs to keep their cash free for more pressing matters, but overall, this isn’t recommended.

Takes Longer to Pay the Balance

The minimum payment on a credit card is the lowest amount the credit card company is willing to accept each month. It can be a fixed amount, typically $25, or it can be a percentage. Most companies charge between one and three percent of the balance, plus any applicable fees. 

When making a minimum payment on credit card bills, the payment goes to the interest charges first. This leaves the balance hardly touched. At that rate, it will take years to pay the balance off. Everyone should be checking the minimum payment warning printed on their statement. This warning explains how many years it will take to pay off the debt when only making a minimum payment each month.

Pay More Interest

Unless it is a 0% APR credit card, interest is charged each month on the remaining balance and any new charges. Making a minimum payment barely covers the interest and fees. The balance remains high, and the next month’s bill will once again charge interest on that balance. If one keeps using the card, they become even further in debt. Over time, that interest that is being paid can add up. 

Any consumer can save money by paying off their credit card balance each month, but when this isn’t possible, they should at least try to pay twice the minimum payment amount. That will be enough to start eating away at the balance, which in turn, lowers the amount of interest charged over time.

Credit Scores Suffer

A credit utilization ratio is used when determining one’s credit score. A credit utilization ratio reflects the percentage of one’s available credit that is being used. This number goes up as the credit card balance rises. Having a high balance that isn’t being paid down dramatically affects the credit score. The professionals at SoFi state, “only making your credit card minimum payment can cost you both in interest and when it comes to your credit score.” Having a low credit score can make it difficult to obtain affordable loans with good terms. It can also affect the ability to get a job or rent an apartment, as credit scores are often checked in these situations too.

Paying more than the minimum balance allows one to pay off their debt quicker, and it saves them money in interest charges. This reflects positively on their credit score and can be quite beneficial in the long run.

Jordan Fried

Jordan Fried

Jordan Fried, who has built some of the most valuable crypto companies in the world today and helped thousands of people get exposure to blockchain assets, pulls back the curtain to help you build wealth quickly and securely.
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