It is hard to resist the temptation to pay only the minimum on your credit card each month. Those small payments are easy to manage, so you feel like you’re in control of your finances (unless you have a lot of debt and the minimum is all you can afford). You may even wonder why anyone pays more than the minimum required.
1. You Pay Interest
The first problem is that you’re paying a significant amount of interest on your loan balance. Credit cards can be an expensive borrowing tool, and you don’t want to keep a balance on your credit card for long. If you’re only paying the minimum, most of the monthly amount you pay goes towards interest costs, and you’re only reducing your balance by a small amount.
2. You Pay for a Long Time
With minimum payments, it can take you ten years (or more) to pay off the card. Again, you’re reducing your debt by a small amount when you make small payments. You need to pay extra to speed up the process.
3. Borrowing Becomes Difficult
If you want to take out another loan, you make it hard on yourself when you let credit card debt linger. For example, you might want to borrow to buy a home or a new car. When you apply for a loan, lenders evaluate your repayment ability by pulling your credit report, and it’s easy for them to see that you can barely manage to keep up with your debts.
Debt-to-Income Ratios
To get approved for an auto loan or mortgage, you need to demonstrate that you have available income to repay the loan. Lenders review your current debt burden (how much you’re currently paying towards your debts each month) and assess whether you can handle more payments. If you’re only making the minimum payment, you’ll have more debt, leaving you with less available income each month for new loan repayments (according to the lender’s calculations). The result? You may not get the loan you want.
The bottom line is that it’s best to pay extra when you have the funds. Paying more than the minimum can help you reduce interest costs, shorten borrowing time, and improve your credit.
How to Pay Off Debt
If you’re ready to move away from paying only the minimum, create a plan to get out of debt:
- Spend less (yes, easier said than done). Paying more than the minimum – even $10 or $20 a month makes a difference, but more is better, especially if you have an emergency fund in place for surprises.
- Consolidate debt if you can save on interest costs (use personal loans or take advantage of a promotional balance transfer offer if you can pay it all off within six to 12 months).
- Avoid the temptation to rack up debt (again) after paying off your debts. Try a strategy like the debt snowball if you want momentum, or the debt avalanche if you want to focus on interest costs.
Credit cards are not necessarily bad. But bad things happen if you’re only paying the minimum every month. Credit cards are excellent tools for everyday spending, and they are often safer to use than debit cards. But it’s essential to pay off the full balance each month. The credit card issuer is still happy to have you as a customer if you spend and pay off your balance in full.
Source: https://www.thebalancemoney.com/why-pay-more-than-the-minimum-315622
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