Are you paying the minimum on your credit cards? If you are, reconsider. Paying the minimum every month on your credit card is a terrible financial decision.
Paying the minimums on your credit cards is the worst kind of “kicking the can down the road.” First, you’re going to be spinning your wheels in interest payments, not putting a dent in your principal balance. On top of that, that’s money that isn’t invested, isn’t paying for important items, and may negatively impact your credit score. Let’s take a deeper dive into the swampy, smelly water of credit card minimums.
What are Credit Card Minimums?
When you hold an outstanding balance, the credit card issuer will keep allowing you to borrow up to your limit. To do so, they will require you to pay a monthly payment. Any time they send you a bill, it will include a minimum payment due. Like it sounds, this is the least amount you can pay without incurring penalties and risk being in default.
Some Statistics on Credit Card Minimums
The average household debt for balance-carrying households is $16,048
The average credit card interest rate is 15%
Only 35% of card users don’t carry a balance, meaning few users are paying off their balance in full each month
The most-typical formula for higher balances calls for consumers to pay 1 percent of the total balance, plus the monthly interest charge and any fee
Check out this table from CreditCards.com:
Source: CreditCards.com research, April 2017. Assumes no late fees or other fees.
Why Paying the Minimums is Terrible
Too often, people use their credit cards as some sort of IOU service. If you don’t have the money to pay them off at the end of every month, you shouldn’t use them. Yet, I understand that things happen and when you’re in a pinch and don’t have an emergency fund, you turn to a credit card.
When you pay the minimum every month, you are the credit card issuers dream. They love when you pay only the minimums because they will feast on the high-interest rate you’re paying. They know that simply paying minimums means you’ll be carrying that ball and chain with you for years. Let’s look at an example…
You have a credit card and you come into many large expenses all at once. By the time you pay every expense, you owe money to the tune of a $10,000 balance. Your card has a 15% interest rate. If you paid the minimum amount due every month, how long would it take to pay off the balance completely? 251 months, assuming the minimum is 1% of balance + monthly interest.
That’s not a typo. It would take you almost 21 years to completely pay it off. In the end, you would have paid $11,285 in interest. This is what many families are doing. They end up paying 200% in the long run to enjoy something today. Did I mention paying minimums on credit cards is a terrible idea?
What To Do Instead
You need to pay more than the minimum, much more. The best thing to do is to pay off the entire balance every month. I completely understand that that is not always an option. I would encourage you to set a goal of paying the complete balance in 6 months, a year, or 3 years. Use a payoff calculator to determine how much you’ll need to pay each month to make that happen. (here is a great calculator from Credit.com)
In the previous example, it took almost 21(!) years to pay off the $10,000 debt. The initial minimum payment would be $225. You have to pay this amount. This means you had to budget that into your cash flow. So instead of continuing to pay minimums, which would decrease based on the amount owed, leave the payment at a flat $225 per month until the debt is gone. This would take 5 years and 6 months. The amount of interest paid would be $4,688. While not as ideal as paying off every month, it’s better than paying the minimums. The more aggressive you can get with those payments the better.
Conclusion: Why Paying Credit Card Minimums is a Terrible Idea – And Can Cost You Big Time
You can see from the examples above how paying the minimums will cost you thousands in the long run. Don’t pay the minimums, ignore them. Use the calculators I mentioned and figure out when you can realistically pay off the debt. Set a goal and get it done. Minimums will get you nowhere fast.