What Happens If I Only Pay The Minimum on My Credit Card?

It鈥檚 always tempting to just pay the 鈥渕inimum payment鈥 on your monthly credit card statement. The minimum payment dollar amount is far more appealing than the actual balance, and it鈥檚 better than nothing, right? If you鈥檙e in a tough bind this month and short on cash, it鈥檚 important to understand what happens if you only pay the minimum every month on your credit card.
Like your student loans, mortgage, or any other loans, a 鈥渕inimum payment鈥 is the lowest possible payment your lender allows you to make on a monthly basis. Each credit card company calculates the minimum payment amounts differently. Some credit cards calculate it as a percentage of your total balance (usually 2% to 4%) and others calculate it as the interest that is on the card that month plus 1% of the balance.
Regardless of how your credit card company calculates your minimum payment, the minimum payment offers a false sense of security to consumers who want to get out of debt sooner. Refinancing credit cards at a lower rate with a personal loan is one reliable method of doing that (ReadyForZero has a tool to check your rate), but if you鈥檙e continue paying off your credit card with only monthly minimum payments, here鈥檚 what happens:

You鈥檙e Paying Off Mostly Interest Not Balance
If you鈥檙e only paying the minimum payment, keep in mind that most of that money is paying for the interest you are accruing on the principal balance and NOT the actual principal balance, or the actual amount borrowed from the credit card company.
Let鈥檚 say that you have $1,000 on your card, and the credit card calculates your minimum as 2.5% of your total balance, then your minimum payment is $25 every month. If your annual interest rate, or APR, is set at 18%, you owe $180/year on your $1000 balance in interest charges. You end up paying $300/year in minimum payments ($25/month times 12 months). So that鈥檚 only $120 that you鈥檙e actually paying off on the principal balance ($300 in minimum payments minus $180 you owe in interest). So your balance is still $880 after a year of you聽making monthly minimum payments.
Even if your credit card calculates minimum payments differently and you might even have a lower interest rate than 18%, your minimum payment mostly goes towards interest and not your principal balance.

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Credit Card Interest Keeps Growing
Credit card companies do not calculate the minimum payment amount to help you pay off your balance faster. They鈥檙e a business, and like any business, they want to maximize their profits. They do this through interest charges, and hope that you will pay just the minimum payment because it maximizes their profits. The longer it takes you to pay off your credit card, the more total interest you pay on your principal balance. By only paying the minimum payment, you鈥檙e only slowly paying off the principal balance that continues to sit there accruing more interest every month.
Using the above example and the ReadyforZero credit card debt calculator, let鈥檚 see how much MORE interest you鈥檙e paying if you only pay the minimum payment of $25 month versus if you chose to pay $50/month.

If you pay the minimum, then it will take you 5 years and 3 months to pay off the credit card, and you end up paying a total of $1,566, or $566 in interest charges.

If you to pay $50/month, then it will take you 2 years and one month to pay off the credit card, and you end up paying a total of $1,205, or $205 in interest charges.

While $25 more a month might feel like a stretch for your budget, think of the small ways you can save to put that extra $25 a month toward your credit card bill. By paying just $25 a month more on your credit card, you save yourself over $350 in interest charges and pay off your card twice as fast.
It Can Negatively Affect Your Credit Score
If you pay the monthly minimum payment, you are still paying your credit card on time and this counts as positive payment history, which is good for your credit score. Additionally, you are not penalized for the extra interest you鈥檙e paying when you only make monthly minimum payments.
But when you only pay the minimum, you are not actually lowering your credit card debt balance by that much. This balance amount is relevant for your credit score, because one factor included in determining your credit score is your credit utilization ratio. This measures how much you use of your available credit. Carrying a balance of over 30% of your credit limit can harm your credit score.
For example, if you have a $2,000 credit limit on your credit card, and you鈥檝e charged over $600 on the card, you begin negatively affect your credit score. The closer you get to $2,000 on that credit card, the more your credit score suffers. If you鈥檙e only making minimum payments, you鈥檙e over the 30% threshold for a longer period of time and the longer you鈥檒l be negatively affecting your credit score.
Bottom Line: Don鈥檛 Get Stuck Always Paying the Minimum on Your Credit Card
Don鈥檛 be deceived by the minimum payment amount printed on your monthly bill, because it鈥檚 been calculated to help the credit card company. Minimum payments will not help you achieve your goals of gaining financial freedom and getting out of debt faster.
Don鈥檛 forget the earlier example! If you only paid the monthly minimum on a $1000 credit card balance, it鈥檇 take you over twice as long and cost you more than twice as much than if you doled out just $25 a month more for your credit card payment.
Paying the minimum payment is not a good idea, and as a long-term strategy, it can be an absolute nightmare. If you鈥檝e found yourself struggling every single month to pay more than just the minimum and are concerned about your credit and long-term financial health, you might also want to consider debt consolidation as an option to help you get rid of your credit card debt faster.
Before you鈥檙e tempted to only pay the minimum this month, try signing up for ReadyForZero to monitor your accounts and payments, and use the credit card debt calculator to see how much your payment this month will affect your long-term financial goals. You can also see ReadyForZero鈥檚 recommended best credit cards.
For additional resources, you can also check out our ReadyForZero credit card debt resource center.

This post was published by Felicity Nie, ReadyForZero Writer for 禄聽ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.


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