Using Credit & Improving Your Credit Score
The Cost of Not Paying Credit Card Minimums
February 28, 2016
Each credit card statement you receive includes a “minimum payment” amount along with transaction, balance and interest rate information. Depending on other parts of your financial situation and your spending habits, the temptation to pay only the minimum can be great. As tempting as it may be, you should always try to pay more.
Credit card companies usually calculate the monthly minimum payment due as a percentage of your outstanding balance. The percentage is usually more than the interest rate they are charging on your balance, but low enough to make the minimum payment amount seem attractive. After all, they make money by charging interest on what you owe.
The cost of paying only the minimum
As you consider how much to pay each month, be sure you understand how all the numbers work. To keep it relatively simple, let us assume you have an outstanding balance of $5000, the annual interest rate being charged is 12% (1% per month) and the minimum payment is 2% of your outstanding balance. If you just pay the minimum of 2% ($100) and have no additional charges, $50 of the payment goes to pay the interest and your balance is paid down to $4950. If you continued on that schedule, it would take you 299 months (almost 25 years) to pay off the balance. On the other hand, if you paid $250 each month, you would have the balance paid off in about 23 months.
Paying more than the monthly minimum will eliminate the balance much faster, save you considerable interest charges and provide some peace of mind knowing you are taking a prudent action.