If you have a high balance on your credit card, it’s often tempting to ignore it and only pay the minimum payments. However, this could become really expensive in the long run, and you may end up paying much more than what you owed to begin with.
Even though making the minimum payments will keep you out of trouble and maintain your credit score intact, it will cost you a lot over time.
Let’s have a look at the real cost of only paying the minimum monthly balance on your credit card.
When you get your credit card statement every month, you have multiple options to make a payment. You can choose to pay the balance in full, choose a specific amount and, and pay the minimum payment.
The minimum payment is, as its name suggests, the minimum amount to pay in order to avoid a late fee. It’s typically calculated as a percentage of your outstanding balance or a set amount, whichever is greater. The interest for the month is then added to your balance, together with any fees included for credit card usage.
As you pay off more of the balance on your credit card, the minimum payment should reduce. However, because interest continues to be added to the balance every month, it will take longer to pay off the balance and you may end up paying much more than you originally borrowed.
Let’s look at an example to see the real cost of paying off a credit card while only making minimum payments.
For a $3,000 credit card balance at the current average APR of 20.20% (as of January 2021), and a typical minimum payment of 2% of the balance, making only minimum payments would take you 50 years and 7 months to pay off the debt.
During this time, you’ll also pay $8,977 in interest, plus any other fees that might apply.
By making a fixed payment of $100 instead of only paying the minimum, you would be able to clear the debt in 3 years and 5 months and pay $1,061 in interest.
It’s generally a good idea to pay off as much as you can each month if you’re using a credit card. That way, you can reduce your balance quicker and pay less in interest.
However, if you’re struggling to pay off the entire balance or a higher amount to help you clear your debt quicker, minimum payments can help. They help you preserve your credit rating while also avoiding late fees.
If you can’t make your minimum payment, it’s important to try to contact your lender as soon as possible. They might be willing to come to a compromise to help you manage payments or at least advise you.
Paying the minimum monthly balance on your credit card may be tempting to save money, but it will add a lot of interest to your balance. Plus, it will take you years to clear off your balance, so try to pay off as much as you can, so you can stay debt free.