If I Were to Make Only the Minimum Payment on My Credit Card, What Would Happen?
Your debt is kept longer when you only offer the minimum payment and it racks up interest charges. Your credit score can also be put at risk by this.
Making the minimum payment on your credit card debt won’t get you very far toward reducing it. Late fees are avoided and your account is kept in good standing when you?re only making the minimum payment on your credit card, but that’s about all it does.
It would be wrong to say you should never do so under any circumstances, because paying only the minimum for a few months can be a way to conserve cash in the short term when you’re experiencing a financial emergency. However, it’s a recipe for serious trouble if it were to be used as a long-term strategy
It will take much longer to pay down your debt
Minimum payment requirements at rock-bottom levels are usually what credit card issuers tend to set. You’ll generally owe whichever is greater from a percentage of the balance and a fixed amount ? often $25. You are required to pay only 1% or 2% of the balance each month by some cards, plus any accrued interest and fees. You won’t make any real progress on paying down your balance by making these small payments on time, but late fees are avoided.
It affects you like this:
?That repayment period gets cut in half if you pay twice the amount of the minimum,? says Ed Mierzwinski, who lobbied for laws requiring these disclosures as the consumer program director of the U.S. Public Interest Research Group, a federation of nonprofits.
Bigger interest charges will be racked up by you
Along with your balances, your interest charges will grow unless you’re using a 0% APR card. You’ll barely wipe out last month’s interest when you make only the minimum payment. And you’ll fall further and further behind if you keep charging items to the card.
?If you only make the minimum payment, then you?re running on a debt treadmill,” Mierzwinski says. ?You never pay it off, no matter how many times you pay, and you pay, and you pay.?
It affects you like this:
Divide your card’s annual percentage rate by 12 and multiply it by your average balance, when you want to estimate your interest charges. When your card has a 21% APR, for example, your monthly interest rate is 21% divided by 12, or 1.75%. Multiply it by the balance you’re carrying. If you paid only the minimum now and, let?s say, you have a balance of $20,000, you’d owe about $350 in interest next month.
By paying more against your balance, you can start next month with less debt.
Your credit scores could take a hit
When your credit utilization ratio climbs ? the percentage of your credit you?re using, every time your credit card balances do. Therefore, high balances can badly damage your credit because your credit utilization ratio is a major factor in your credit score. That makes it even tougher to be eligible for credit cards with the best terms and affordable loans. Your ability to rent an apartment or find a job can even be affected by this, as landlords and employers commonly review applicants’ credit.
It?s best to use less than 30% of your credit limit on any given card. It?s even better if you can use less.
Focus on bringing down your balances as much as you can if your debt is bumping up against your credit limit. Try paying your credit card bill right after payday if at the end of the month you feel squeezed for cash. Put extra cash toward your debt by volunteering for more shifts at work, if you’re able to.
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