Why Credit Card Minimum Payments Are a Bad Idea
When your credit card statement comes in, you’ll see one section that mentions your minimum payment due. This is the minimum amount the credit card company expects you to pay toward your balance by your payment due date.
Only paying the minimum due to your credit card each month may seem like no big deal. But it can be costly and take you longer to get out of debt.
What is the minimum payment due on a credit card?
Your credit card minimum payment is the amount you’re required to pay to avoid any penalties. Credit card companies can set the minimum payment due using different calculation methods. For example, your minimum payment can be set as:
- A percentage of the total balance, typically between 2% and 5%
- A percentage of the balance and a monthly finance charge
- A flat fee
Your credit card agreement should specify which method is used to calculate your minimum payment due. Credit card minimum payments can increase or decrease based on:
- Card balances
- Changes to the APR
- Payment history
Missing the minimum payment due date can trigger a late payment fee. Your credit card company can also impose a penalty APR.
Is it bad to just pay the minimum payment on a credit card?
Your credit card company isn’t going to scold you for only making the minimum payments to your account each month. But there are several negative side effects of doing so.
It will take longer to pay off the balance
Only paying the minimum due means you’ll stay in debt longer, especially if you have a credit card with a higher APR. If the interest being added to the balance each month is greater than the minimum payment, you’re essentially taking one step forward and two steps back.
If you’re curious about how much longer you’ll be in debt from just making minimum payments, check your credit card statement. The 2009 CARD Act requires credit card companies to issue a minimum payment warning on customer statements.
You’ll pay more in interest charges
Unless you have a credit card with a 0% APR, carrying a balance month to month means paying interest. The higher the APR, the more interest you’ll pay.
If you’re only making the minimum payments, that might not be enough to cover the monthly interest charges. And even if it is, a longer payoff period means more money you’re handing over in interest to the credit card company.
Your credit scores could take a hit
FICO credit scores are largely based on payment history, with on-time payments counting in your favor. But your credit utilization ratio also plays an important part.
Credit utilization refers to the percentage of your available credit limit that you’re using at any given time. Keeping balances low relative to your card limit can help your score while maxing out your credit cards can hurt it.
If you’re only making the minimum payments due to your credit cards each month and you’re still charging new purchases, you may not be leaving much of a gap between your balance and card limits. As your credit utilization increases, your credit scores could suffer.
You should see a box on your statement showing how long it will take to pay off your balance if you only pay the minimums. Depending on how much you owe and your minimum payment due, the payoff time could be years.
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What if I pay more than the minimum amount due?
Increasing your monthly credit card payment, even if it’s only a few dollars above the minimum, can offer several benefits.
For one thing, you’ll be able to make a bigger dent in what’s owed. That in turn can help reduce your credit utilization and save you money on interest charges.
If you’d like to increase your monthly payments, there are a few tactics you can try. For example, you could:
- Double up and make the minimum payment every two weeks
- Pick a set amount to pay above the minimum each month
- Use windfalls, such as a tax refund, to pay off part of your balance all at once
- Consolidate debt using a 0% balance transfer off so more of your payment goes toward the principal
A debt consolidation loan is something else you might consider if you’re struggling to keep up with minimum payments on credit cards. Consolidating debt with a personal loan allows you to go from making multiple payments to just one. And if you have good credit, you may be able to save money on interest if you qualify for a loan at a low rate.
When you’re ready to find a personal loan for debt consolidation, take time to compare different lenders. Specifically, look at the APR, fees and loan repayment terms being offered to find the best deal.