Why Minimum Payments Don’t Work

By September 10, 2012Budgeting, Credit Cards, Payment

Credit card payments can be stressful, to say the least. Unfortunately, many people adopt a false sense of relief when making minimum payments each month. What they don’t realize is that this tactic does little to make any headway in terms of escaping debt. A minimum payment may keep your head above water, but it won’t actually save you from drowning.

With the minimum payment, you are safe in that your payments are on time, but it is the accruing interest that is of the most concern. The longer you have a balance, the more interest you are going to pay. Credit card companies are also notorious for their fees, and one late payment can earn you a $29 late charge and may even increase your interest rates. At this point, it is all too easy to exceed your spending limit. Before you know it, you are hit with an over-the-limit fee on top of everything else.

Once you begin paying fees in addition to your interest, your debt can quickly spiral out of control. A large payment is needed somewhere, but most people don’t have the available funds to stop the debt from accumulating. It is only a matter of time before you’re buried so deep in debt that minimum payments are not enough to dig you out.

If we run some numbers based on our current economy, we can clearly see how paying only minimum payments is harmful to our credit card health. With a $2,000 balance at 9.9 percent interest, the minimum payment is $40. At that rate, it would take 10 years to pay off the balance, and you would have paid $997 worth of interest – that’s almost $1,000 in interest paid for spending $2,000 you didn’t have in the first place.

But most people don’t have 9.9 percent interest rates – they have 18 percent interest rates and balances closer to $5,000.  With a minimum payment of $100, it would take you 35 years to pay it off. And for the privilege of having that $5,000 to spend, you would pay $12,863 in interest alone.

Minimum payments might seem like the easy way to budget, but they only benefit the credit card company.

By the time you pay off a credit card using minimum payments, you won’t even remember what it was that was so important to buy at the time. Employ proper spending habits and don’t be fooled by marketing schemes. You may get five cents off per gallon with the use of your card, but at 10 percent interest, it’s not quite the benefit you were expecting. Remember: If you can’t afford it with cash, you cannot afford it with your card.

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