Understanding Minimum Payments
A credit card bill, at first glance, tells you three important things. What date your payment is due, what the minimum payment you are allowed to make is, and how much your balance is since your last bill. A lot of people like to take the easy road and make the minimum payment. After all, if you can get away with just paying a meager $30 per month (or less), then why shouldn’t you? The credit card company is getting their money, and you are paying off your balance. All is good.
Not exactly.
The trick with minimum payments is that they are a bit of a black hole when it comes to your credit card balance. A minimum payment is not just a random number chosen by your credit card company based on the specific card you have. Instead, it is a specific percentage of your current balance. To you, it looks like a grand deal, but to them, it is a great way to make extra money.
You already know that credit card companies make their money by charging interest on their cards. You should also know that as long as you have a balance, they will continue to earn interest. What you may not realize is that credit card companies keep the minimum payments nice and low so that you keep happily paying them. Meanwhile, the interest on your balance continues building and your credit card company is making a nice mint from you. The interest simply keeps on compounding as you attempt to pay off your balance with just a handful of money each month.
Instead of having a steady decrease in your balance like you expected, though the decrease may be steady, it will not be fast. Even if the minimum payment and interest do not balance each other out, you are still only shaving a few dollars off each month. If your balance is high, you might be in a position to say goodbye to any chance of paying it off. The minimum is meant to keep you paying, and even though it feels nice to pay such a low amount every month, in the long run, you are paying a lot more than what you originally purchased those DVDs for.
Unless your balance is extremely low, you should avoid paying the minimum at all costs. And if your balance is extremely low, then there is no reason for you not to pay it off altogether. Consider for a moment you only used your card once in any particular month and only put $25 worth of gas on it. Why would you pay a minimum of $15 when you could just as easily pay off the whole thing in that billing cycle?
Paying your balance off entirely is the only sure way of avoiding interest. If you are unable to do so because your balance is so large, then pay more than the minimum. You do not have to overexert your finances; simply formulate a payment plan for yourself. If your minimum is $75, pay $100. You might find that paying a little bit more each time will lower your balance considerably, and you will be just that much closer to freeing yourself from paying more than was necessary.
Finding yourself completely unable to pay any more than the minimum means you need help. Find a non-profit credit counseling agency get assistance before you get so deep into debt you are unable to get out.