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The Dangers of Only Paying the Minimum Payment

Published April 29, 2019

bill with title new balance minimum payment

Why Is It Dangerous to Only Pay the Minimum Payment?

Most credit cards make you pay a minimum payment every month to keep your payment schedule current. This minimum is typically an amount based on a percentage of your balance but can be a fixed amount. If your wallet is tight, it can be tempting to only pay the minimum.

However, the less you pay now, the more you pay later. Carrying a credit card balance not only means you will remain in debt for a longer amount of time, but also means that that debt will get larger as your amount accrues a lot of interest. If you have a high-interest credit card, with double-digit interest rates (as the majority of households in America do), this means your debt can get away from you in a very short amount of time.

Credit cards aren’t a free product by design. They don’t exist so that you can buy things when you don’t have the money (even though they do allow you to do this), they exist so that banks can make money. One way banks have found they can make more money is by lowering this monthly minimum. In the past, credit card minimums hovered around 5% of a card’s balance. Today, the average is around 2%.

Paying only 2% of your balance with an interest rate in the double-digits means that by the time you pay off your debt, you may have paid twice the original debt. This assumes that you aren’t using your card while paying off your debt, a common occurrence which can lead to even more debt.

What Can this do to your Credit?

Misusing your credit cards can have negative consequences on your credit rating. There are benefits of credit card use, and building good credit is a crucial part of having a credit card. Having good credit is key to your financial life in general, helping you to buy a car, rent a house, or even get a job.

So, be warned.

If you have a high-interest credit card with a large balance and you are having trouble making the minimum payments, one solution that might look helpful is to transfer part or all of your balance to a card with a lower interest fee. Even though this may not seem like poor financial decision making, it affects your credit. Unfortunately, doing this can be a red flag to lenders, employers, landlords and others who might evaluate your credit at a time when you just want to get ahead.

Also, know that balance transfers can increase your debt. Often, these options come with a price — a hefty fee for the privilege of transferring that balance.

It’s best overall to keep your balances down, and when you do make a payment on your card, it’s always the best idea to pay as much as you can and to never pay only the minimum balance.

CreditGUARD can help you manage your debt situation and consolidate your credit cards and personal loan bills down to one easy monthly payment without any new loans. To speak with a certified credit counselor, call CreditGUARD today at 1-800-500-6489.

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