Making Minimum Credit Card Payments

As many Americans have discovered, making only the minimum monthly payments on your credit cards can be a big financial mistake. When your budget is tight, sending the smallest payment the credit card company requires may seem like the best course of action but, in reality, this practice may only put you deeper into debt if you continue to use your cards.

The cost of making minimum payments

The following example shows how making minimum payments affects your debt. If you buy an HDTV for $1,000 and put it on a credit card with an18 percent annual interest rate and make only the minimum payment, it will take seven years to pay for that purchase. And the worst part is, you’ll pay more than $1,500 above the purchase price in interest. So, in reality the TV didn’t cost $1,000 at all — it cost $2,500.

A wiser use of credit would be to make a larger payment each month by adding $50 to the minimum payment required; then you would pay the debt in just 16 months and the total price for the HDTV, including interest, would be $1,100 —$1,400 less than if you’d only made the minimum payment.

When you consider that many consumers owe balances on several credit cards, you can see how making the minimum payment on each one can have severe financial consequences.

Alternatives to making minimum monthly payments

It’s always best not to carry credit card debt at all by paying your balance in full each month, but if you must use credit cards, use them wisely and with restraint. If you can’t afford a big enough monthly payment to pay the balance in a reasonable amount of time, it might be better to wait on that particular purchase.

If you’re already bogged down with credit card debt, don’t use your credit cards for new purchases; rather, start paying down your balances. It’s important to send more than the minimum payment each month. This may be a struggle, but you will pay your debt much faster while saving money on interest and improving your credit score.