If you pay the minimum amount on your credit card, it could take longer to pay off your balance. This can lead to higher interest costs and damage your credit score.
Your credit card issuer will typically give you a warning in every monthly statement about how long it will take to pay off your balance if you make just the minimum payment. This will help you decide if paying the minimum is really the best way to go.
You’ll Pay More In Interest
When you pay the minimum amount on your credit card, you’ll end up paying a lot more in interest than if you paid the full balance. This is because your card issuer will calculate the minimum payment based on either a fixed dollar amount or a percentage of your balance, plus any interest charges and late fees that have accrued over the billing cycle.
Your statement shows the total amount you owe on your account as of the last day of the billing period. The card issuer averages your daily balance during the entire billing cycle and then multiplies that number by your interest rate to determine your interest charge.
If your interest rate is 24% and you make the minimum payment of 1% of your balance plus a monthly finance charge, that will mean you’ll have to pay over 50 years to pay off your debt. That’s an extra $28,397 in interest payments compared to if you had paid the entire balance.
You’ll Be In Debt For A Longer Period Of Time
Paying the minimum amount on your credit card might seem like a no-brainer, but it’s one of the biggest mistakes you can make. The reason is that this small payment will only keep you in debt for a longer period of time.
The best way to avoid making this mistake is to set up a budget and stick to it. This will help you keep your expenses under control and give you an idea of when to start paying more than the minimum.
In addition to the budget, you’ll need to make an effort to find ways to cut back on your spending. This will not only keep your finances in check, but will also help you free up some of that extra cash to put toward your debts.
You’ll Damage Your Credit Score
A credit score, which ranges from 300 to 850, is a numerical rating that measures a person’s likelihood to repay debt.
Your payment history is one of the most important factors in your credit score, accounting for 35% of your score.
But while making minimum payments on your credit cards might not hurt your score to begin with, it can actually harm it later on.
Credit utilization, which measures the amount of credit you’re using compared to how much you have available to you, increases when you only pay the minimum.
That means your credit utilization ratio, which accounts for 30% of your credit score, won’t be as low as it should be.
And it can cost you a lot of points. In fact, paying just the minimum can lead to a credit score drop of 30 or more points.
You’ll Be Charged A Late Fee
Paying the minimum amount on your credit card is not a good idea, as it can make you pay more interest and damage your credit score. Instead, try to make payments on time each month and pay your balance off completely by the end of the year.
Fortunately, the Consumer Financial Protection Bureau is working to put limits on credit card late fees that banks can charge consumers. The agency wants to limit the maximum fee to $30 for first-time late payments, and $40 for subsequent ones.
You should find out how your minimum payment is calculated by checking the terms of your credit card agreement. Some issuers charge a flat percentage of your statement balance, excluding interest and fees, while others split the minimum into multiple tiers based on how often you miss a payment.