Why You Should Be Avoiding Your Minimum Payment

Disclosure: We are not telling you to avoid making your minimum payment altogether, that would be nonsense.

When debt begins to pile up, it’s nice to know there are options for paying it off. Credit cards and other types of loans often have minimum payment options, which allow a person to only pay a portion that month of the total amount due. This can seem enticing, especially during a particularly tight month.

Even though the minimum payment is a much more attractive amount to pay than the total balance due, there are some negative consequences to this practice.

Stay In Debt Longer

When you pay the minimum payment, you do avoid repercussions such as late fees. The reality is, though, your minimum payment is doing little to eliminate your debt.

Oftentimes, it can take many years to pay off debt if you are only making the minimum payment, Fox Business explained. If you are continuing to use the card for purchases, this is even more pertinent.

If your credit card balance seems to grow every month and you feel overwhelmed, the best thing you can do is put away the credit card for good.

Don’t make any more purchases with it until your debt is paid off or at least more manageable. Continue to make payments until the debt is completely cleared. When you pay your credit card bill each month, make sure to pay as much as you can afford to – not just the minimum payment.

Once your credit card debt is paid off, you can begin using the card again. This time, though, keep an eye on how much you charge. Be sure to only put as much as you can comfortably afford to pay off in full at the end of the month.

Damage Your Credit Score

Your credit score is an important number that future lenders, landlords, mortgage brokers and employers will look at before making a financial agreement with you. If your score is low, you are less likely to get a loan. If a lender does agree to grant you one, the loan will probably have a higher interest rate than if your score was higher.

According to myFICO, there are five unique factors that affect your credit score.

Some affect it more so than others and the two that impact it the most are your payment history and amounts owed. If you are perpetually owing money and only paying the minimum payment month after month, your credit score will suffer.

NerdWallet explained continuing to charge a credit card but neglecting to pay off your balances each month will take its toll. Slowly but surely, your credit score will begin to fall. On the other hand, if you pay off your balances and make sure to only spend as much as you can pay off at the end of each month, you credit will begin to improve again.

Rules That Changed The Minimum Payment

Lucky for credit card users, paying only the minimum balance isn’t as harmful as it used to be. In 2003, the Federal Reserve created a set of guidelines for credit card issuers to follow in regard to credit card lending. One of the main topics the guidelines addressed was that of minimum payment requirements.

In the guidelines, the Fed outlined what they called an inappropriate practice of setting the minimum payment requirement so low that a person may never be able to escape his or her credit card debt. This was because the minimum payment was lower than the amount of interest that would accrue on the card.

Even if a person in this situation ceased using the credit card, the debt would continue to accumulate and minimum payments would not be enough to pay it down.

To discontinue this practice, the Fed stated that credit card issuers needed to make sure the minimum payment requirement would be enough to effectively pay off a person’s credit card debt within a reasonable amount of time.

Fox Business explained that rules about what additional information would be included in credit card statements improved people’s understandings of minimum payments. Issuers need to explain how long it will take to pay down the debt if only the minimum requirement is paid.

More people now choose to pay more money than the minimum requirement due because they understand how long they will be in debt if they don’t.

When It’s OK To Pay The Minimum Balance

While it can be detrimental to rely on the minimum balance to get by each month, there are some cases when it could be beneficial to utilize this option.

One example is if you have many different sources of debt where one has a higher interest rate than another. In this case, you may want to focus your financial resources on the debt with the higher interest rate, while only paying the minimum balance on the other. This will help you eliminate the more damaging debt faster. When it’s paid off, begin allocating more funds to your second debt source.

Minimum payments may seem like a saving grace when money seems scarce. However, neglecting to pay your credit card balances in full can create more harm in the future. By practicing some good payment processes, you can pay down your credit card debt faster.

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