This is How Credit Card Minimum Payments Keep You in Debt
We’re going to make a bold statement here. Ready? An £80 pair of shoes shouldn’t cost £95. Disagree? Then you might be a credit card company. While it might strike you as obvious that purchases shouldn’t cost you more than the sticker price, the truth is that they often do, and that’s thanks to credit card interest.
Depending on how you pay off your credit card balance, interest can end up costing you significant cash in the long term, and even keep you in debt for decades. Here, we’ll dive into credit card minimum payments, explain how paying the minimum keeps you in debt longer, and what you can do to stop this cycle. Ready?
What are Credit Card Minimum Payments?
A credit card minimum payment is the lowest amount of money that you have to pay to your credit card company or bank each month to keep your account in good standing. Your minimum payment is typically a percentage of your outstanding balance, and it's calculated based on the terms and conditions set by your credit card company.
How is a Minimum Payment Calculated?
Your minimum payment is usually a small percentage (typically ranging between 1-3%) of your total outstanding credit card balance at the end of the billing cycle. It’s also not uncommon for credit card companies to have a fixed minimum payment amount, such as £25.
What Happens if You Only Pay the Minimum on Your Credit Cards?
Making the minimum payment is critical for avoiding late fees and maintaining your credit score, but it can also lead to long-term financial consequences and keep you in debt longer. In fact, according to The Money Charity, it would take over 26 years of minimum monthly payments to pay off a credit card on the average interest rate.
Here, we’ll take a closer look at what happens if you only pay the minimum on your credit card.
1. You’ll Maintain or Even Build Your Credit Score…
There are good things about making the minimum payment. Payment history is one of the most important factors influencing your credit score. A single missed payment can significantly damage your credit score and be visible on your credit report for as long as six years.
A low minimum payment can help you make timely payments and keep your credit in good standing. If you’re just starting the credit-building journey, making the minimum payment can demonstrate your reliability to banks and credit card companies, and even give your credit score a boost.
2. …But Interest on Your Credit Card Balance Will Swell Rapidly
If you only make the minimum payment, you’ll be carrying a balance on your credit card from month to month. Credit card companies can charge interest on that balance. If you don’t pay it off in full, you could quickly find yourself in a situation where the amount of interest you owe is greater than your actual balance.
While making the minimum payment can give your credit score a boost in the short-term, it’s not a sustainable long-term strategy. Continuing the habit of making only the minimum payment can plunge you into long-term debt and damage your debt-to-income ratio, sending a negative signal to banks and lenders that can impact your ability to secure credit in the future.
Want to Boost Your Credit? Pay More Than the Minimum
If you’re struggling one month, making the minimum payment can be a wise choice, as it allows you to maintain a spotless payment history, while keeping more of your money for other necessities like rent, utilities, and groceries.
That said, making the minimum monthly payment isn’t the only payment strategy out there, and you should always pay more than the minimum if you can afford to do so. Here’s why.
Pay More, Keep More of What You’ve Earned
If you pay your balance in full, credit card companies won’t be able to charge you any interest. This means that you’ll only be paying off the money you used. Remember, the best strategy for using a credit card is to treat it like cash: always avoid making purchases you can’t afford to pay it off straight away.
Paying More Gives Your Credit Score a Helping Hand
Timely payments are vital for your credit score, but they’re not the only thing that helps. Paying your balance in full gives your credit score a boost by keeping a low debt-to-income ratio and demonstrating that you’re capable of managing your finances like a pro.
Keeping your balance low-to-nonexistent can help you qualify for credit cards with better interest rates and other types of financing like personal loans and mortgages.
Need Help Making Your Credit Card Payments?
If you’re struggling with your monthly credit card payment, it’s important to pay at least the minimum. If it’s a stretch to pay anything beyond that, consider the following options:
Get a Balance Transfer Credit Card
Balance transfer credit cards allow you to transfer your credit card balance to a new card with an interest-free introductory period. This gives you a chance to pay off your old card’s interest.
Keep in mind that if you can’t pay off your balance by the end of the interest-free introductory period, getting a balance transfer card could ultimately push you deeper into debt.
Consider Debt Counselling
If you’re struggling to get out of debt, connecting with organisations like StepChange and CitizensAdvice can help you navigate your way out. While reaching out can be intimidating, it’s an important choice to make, as debt can have a significant impact on your mental health.
Track Your Payments With the Pave App
Pave can help you make your credit card payments by tracking payment dates and your bank account. This gives you an at-a-glance view of where you stand for the month, helping you make better decisions that enable you to pay off more of your credit card balance.
Plus, the Pave app gives you personalised credit advice, helping you take your credit score to the next level. Are you ready to join the hundreds of thousands building credit with Pave? Then download the app from Google Play or the App Store today!