Anyone who has received a monthly statement for their credit card has surely noticed the highlighted line on their bill: the minimum payment. It’s almost always big, bold, and accompanied by a colorful background to draw attention to it, making it seem like it’s the most important thing on the page. And because of that, many people get the impression that it’s all they should pay that month. But in most cases, it’s not.
If you look closely at your monthly credit card statement, you’ll likely see three amounts that you can pay:
Minimum payment – The minimum amount that will keep your account in good standing.
Statement balance – The entire balance accumulated during that billing period.
Current balance – The most recent bill plus any charges made to your account up to that day.
If your financial situation allows for it, you should always pay the statement balance in full. Doing so will allow you to avoid any interest charges or fees, as long as you pay on time. If you aren’t able to pay the statement balance in full, you should aim to pay as much of it as you can. You’ll still incur some additional charges, but at least they’ll be based on your reduced balance.
The minimum payment, however, should only be used as a last resort. But since it’s always the lowest option on the bill, it’s a common choice for many consumers – around 20% of credit card users only pay the minimum balance on their credit cards. Whether out of necessity or by choice, these consumers’ credit card health is at risk.
The truth about minimum payments
Credit cards are a convenient payment method that make it easy to buy what you want, when you want. Most consumers know they’ll be charged interest and possibly other fees on their purchases, but there isn’t a lot of clarity as to how and when those charges apply. And unless you’re adding up interest charges across all of your statements, it can be tough to see the long-term cost and implications of making only the minimum payment.
Here’s a real-life example.
Say you have a credit card balance of $1,000 at 18% APR.
If you were to only pay the minimum balance ($30) each month, it would take 10 years to pay off, and you’d pay a total of $798.89 in interest — almost the cost of the initial purchase!
If you were to pay just $10 more each month (for a total of $40), it would take you 4 years and 6 months to pay off, and you’d pay about half the amount of interest – $381.79.
And if you were to pay a fixed $100 towards it each month, you’d pay it off in only 11 months and pay only $91.26 in interest. A drastic reduction in both cost and time.
While not everyone can afford to pay $100+ towards their bill each month, it’s important to be aware of the cost of making minimum payments. While the lower monthly cost may be enticing, it ends up being very expensive and difficult to fully repay the debt.
Why minimum payments are a threat to credit card health
Credit cards have the potential to help consumers become more financially flexible, improve their credit scores, avoid interest charges, and more. Minimum payments, while sometimes the only choice, often stand in the way of these benefits.
Longer repayment timeline. As demonstrated in the example above, only making minimum payments will dramatically extend your repayment timeline. And that’s if you stop spending entirely, which isn’t realistic. That 10-year timeline would extend significantly if the cardholder kept adding to that $1,000 balance.
Higher costs. While the lower payment option might seem enticing in the short run, it ends up being a lot more expensive in the long run. The slower you pay down your balance, the more interest you accrue, and the more you end up paying over the course of repayment.
Fewer opportunities. While making minimum payments won’t directly affect your credit score, it can put you in a situation that could make it difficult to obtain other financial products. If lenders see that your credit card balances are growing without a means to pay them off, your eligibility for loans or other products may be reduced.