The Dangers of Paying Only the Minimum Payment on Your Credit Cards

by Samantha Bennet on 2013/02/12

Are you thankful because each month, your credit card statement indicates a minimum payment amount that is so light, it may not even affect your budget?

You might be among the thousands of consumers who can’t resist the temptation to pay only the minimum amount required every month. You may be spared from default for now, but there is no other reason to be thankful about it.

On the contrary, you should strive to pay a much higher amount than the minimum payment required monthly. If you want to save on overall costs, eliminate debt faster, and improve your credit score, you should not resort to paying only the least payment amount on your credit card or revolving bank debt each month.

Keeping the debt for too long

If you make minimum payments each month on your credit card or revolving bank debt, you are effectively prolonging the lifespan and duration of that obligation.

Come to think of it, you may just be covering only the interest charges and other fees each month. Your total debt will likely remain the same size. If you stick to this strategy, you may take 10 years, 15 years, or even more to fully pay your debt.

Experts always assert that debts, especially credit card obligations, get more expensive the longer they exist. That is because each month, interest charges and additional fees are incurred and added to the principal.

It does not help that minimum payments required each month may account for only about 1% to 5% of total outstanding balance. Worse, credit card companies do not mind if you make minimum payments; in fact, they prefer it if you do so because that is how they can earn more income from you.

Risks of incurring a negative credit score

Believe it or not, you are in danger of possibly creating a negative impact on your credit record if you keep on paying only minimum required payment each month. In time, credit bureaus may interpret such action as an indication of your lack of effort in debt management.

Needless to say, this may contribute in making you an unattractive target to prospective lenders in the future.

And because it may take longer for you to fully wipe off your debt if you pay minimum payments each month, you may have to wait longer if you intend to apply for an auto or home loan.

Although some lenders will not mind if you are servicing other debts before you get another one, it may be riskier on your part. You may suddenly be overwhelmed if you repay more and bigger financial obligations each month.

At this point, you may have arguments on your mind whether paying minimum payments is good or bad. It can still be acceptable especially if your financial condition does not allow you to make bigger debt payments.

For now, while you contemplate on ways to get rid of your debts for good, it would be better to stop making loans or using your credit cards for unnecessary and discretionary spending.

Use our handy calculator to figure the true cost of paying the minimum.

Do you agree that it is better to focus on reducing debt than to manage taking more debts? Leave your comments below.

Next read: Learning to Live on One Income So You Can Enjoy Retirement

Courtesy of CreditCardShoppe.com

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