No matter how big your credit card balance may be, your credit card issuer will only require you to pay a small portion of it each month. This small required payment is called your minimum payment and is the least amount you can pay on your credit card and not be considered late. The minimum payment is usually calculated as a small percentage of your credit card balance, e.g. 3% or 4%. That means you might only be required to pay $40 on a $1,000 credit card balance.
You might be tempted to pay just the minimum each month – it’s a lot easier and you don’t have to spend nearly as much money as you would if you paid the full balance. Before you get in the comfortable habit of making just the minimum payment each month, make sure you know what you’re getting yourself into.
It Takes Longer to Pay Off Your Balance
Paying only the minimum on your credit card won’t help you pay off your credit card balance. Not only are you paying just a small fraction of your balance, a portion of that small payment goes toward paying credit card interest and your balance only goes down by a small amount each month. The higher your interest rate, the higher your monthly interest charge will be, the longer it will take you to pay off your balance and the more you’ll end up paying in interest by the time you finally do pay off the balance.
You Pay Much More for Your Purchases
Making minimum payments means it you’ll pay much more than the original price for everything you purchase with your credit card. Let’s say, for example, you bought a $100 pair of shoes on a credit card with a 17% APR. If you pay just the minimum, it will take you 5 months to pay off the balance and you’ll pay an extra $3.69 in interest. It’s not much since we’re talking about only a small balance, but amount of interest grows as your balance grows.
Consider a new set of living room furniture for $1,500 that you finance at 17%. If you make just the minimum payment, it will take almost 5 ½ years to pay off the balance and you’ll pay a total of $2131.85. That’s an extra $631.85 on top of the $1,500 sales price for the furniture. That extra interest is money the credit card issuer makes by allowing you the convenience of paying your balance over time.
Your Credit Score Might Suffer
If you have a high credit card balance, paying just the minimum isn’t helping your credit score. A large portion of your credit score – 30% – is based on the amount of the credit limit you’re using. The higher your balance compared to your credit limit, the worse it is for your credit score. You can help your credit score by paying off big balances quickly, but if you’re only making the minimum payment, your balance won’t go down by much each month. Whenever big balances are hurting your credit score, paying just the minimum prolongs the time it takes to raise your score.
Paying off your balance faster lets you save money on interest, boost your credit score, and get rid of your balance quicker. You can’t accomplish any of these by paying only the minimum payment each month.