How Credit Card Minimum Payments Actually Work

Does this sound familiar? You receive your monthly credit card statement and look at the total balance due. Your first thought is “with all my added expenses this month, I’ll just pay the minimum payment that’s required.” While this decision to push aside the remaining balance owed helps you out in the short term,  it will end up costing you a lot more down the line. This is especially true if you never get to paying off that full balance. 

Let’s take a closer look at the top three long-term effects that making only minimum payments has on your financial well-being:

Expect to Pay More

Most credit card companies calculate their customer’s minimum payment owed by using a percentage of their overall card balance. On average, that percentage is roughly 2 percent. When reviewing your monthly statement, this can easily trick you into believing that you don’t really “owe” that much. In comparison, the minimum payment appears much more manageable than paying the full balance.   

Unfortunately, those smaller minimum payments are quickly counteracted by the much larger interest rates on your card. So, while you continue to pay the minimum amount owed every month, those interest rates continue to accrue and raise the overall balance on your card. In the end, you could be paying more than half of the original balance!

Prepare for a Lengthy Time Commitment 

Paying only the minimum requirement on your credit card every month can feel a lot like running a marathon with no finish line in sight. You may see some slight progress on your overall journey, but the reality is that you’re not effectively paying off your debt. 

Revisiting our earlier example: Let’s say you have a credit card balance of $6,000 and your minimum monthly payment is $20. If you were to pay only the minimum of $20 every month, it would take on average around 14 years to pay off your card. Now, let’s say you were to double that monthly payment to $40, you could bring your payoff timeline down to around 5.5 years—a decrease of over 60%! (NerdWallet).   

Your Credit Score Could be Impacted 

One major factor that contributes to your overall credit score is your credit utilization ratio—the comparison of how much credit you currently owe versus how much credit you have available to you. In fact, this factor alone can impact up to 30% of your credit score. 

Now you may be asking, “how do minimum payments play into this?” Well, here’s a perspective to consider: the longer you have a remaining credit card balance, the more interest you end up accruing. That accrued interest raises the overall balance on your credit card and leads to a higher credit utilization ratio, which can negatively impact your credit score. 

A Simple Solution to Managing your Credit Card Debt

If you currently find yourself in the cycle of making only minimum required payments, consider refinancing your credit card balances with a personal loan through Credit Direct. A personal loan can help you save money on interest and give you one affordable monthly payment. Apply online to check offers with no effect to credit score. 

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