by Dana George | Published on Nov. 24, 2021
Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Minimum-only payments may be convenient but they are ultimately expensive.
Credit card debt is a lot like body weight: It adds up when you're not paying attention and can be hard to get rid of. Once credit card debt has crept up, your monthly budget may feel too tight to pay more than the monthly minimum payment.
There is no industry-wide interest rate or even an agreed-upon way to calculate the minimum payment. Each credit card company sets its rate, and you'd better believe they design minimum payments in a way that benefits their bottom line. According to data from research firm R.K. Hammer, credit card companies hauled in $176 billion in 2020, despite the global pandemic.
One way credit card companies tilt things in their favor is to trap consumers in an endless cycle of making payments on high-interest debt. The average interest rate on a credit card is 16.13%, which makes paying down the debt much more challenging. Credit card companies love it when consumers make only the minimum payment because it earns them more money.
If you're in the habit of making a minimum credit card payment each month, here's what happens.
Let's say you routinely use a credit card charging an interest rate of 16%. A nearby electronics store is going out of business, and you snag a 65-inch TV that usually sells for $3,500 for $2,700. If you pay the balance in full before the next billing cycle, you get a real bargain – a sales price and no interest payment.
Imagine that you don't feel comfortable paying the balance in full, so you make a $63 payment each month until the card is paid off. If you never add another charge to the card, it will take five years and four months to pay in full, including $1,330 in interest payments. Altogether you spend $4,030 for the TV, and by the time you're done paying for it, it's over five years old, and newer models have been released.
Would you have agreed to purchase the TV that day in the electronics store if you'd known it was going to cost you more than $4,000?
A FICO® Score is a three-digit number based on information gathered from your credit reports. A score can range from 300 to 850, with a higher score indicating you've managed your financial obligations well in the past. While there are other scoring systems in place, FICO is the most commonly used in consumer lending. FICO is quite secretive regarding the precise manner in which they arrive at a score, but roughly speaking, it breaks down like this:
Now, back to that credit card you're making the minimum payment on each month. As long as you hold on to the card and pay at least the minimum, both "length of credit history" and "payment history" benefit.
Where you could find yourself in trouble is with the "amounts owed" category. The longer it takes you to pay a debt off, the longer you're utilizing a chunk of your available credit. If that's the only debt you have, it's probably not a problem. However, if you routinely make charges to credit cards and make the minimum payment on each, it's safe to expect it to ding your overall credit score.
Once you get in the habit of making minimum payments only, it can be hard to change. For one thing, interest on the debt eats away at the money you could have otherwise kept in your bank account and used to pay the debt off in full. And if your amount of credit owed does ding your credit score, it can be tough to convince your credit card company to lower your interest rate or qualify for another card with a 0% APR.
Your best bet is to always pay credit cards off as quickly as possible. Can't do it today? That's okay. Using the same scenario as we used earlier, let's imagine that you pay an extra $50 on top of the $63 minimum payment each month, for a total monthly payment of $113. Instead of paying the card off in five years and four months, you'd pay it off in two years and five months. Rather than paying $1,330 in interest, you'd spend $573.
Winston Churchill once said, "Perfect is the enemy of progress." In other words, you don't have to be perfect; just keep moving in the right direction.
If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you’ll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read The Ascent's full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.