Minimum Payments

Our relationship with our credit card is a tricky thing and it is easy for some people to get into bad habits. If you open up your monthly statement when it comes in the mail and the first thing you look for is the minimum payment due, you’ve fallen into one of these bad habits. Making minimum payments is one step on the road to credit card pain. Along the way we all have days when finances are threatening, but making minimum payments is very expensive. Let’s see why. The minimum payment pretends to be your friend, but it is really the friend of the credit card company. Most credit card companies require a minimum monthly payment of as little as 2%. Check your agreement for how they calculate the number. That number covers the company’s legal obligation to cover all fees, interest due, and some principal. It also allows them to keep you in debt to them forever at an interest rate of 15% or more if you are unable to pay more. That’s an ugly thought. As an example, let’s say that you have a $1000 balance on your credit card that has a high interest rate of 20%. You used the $1000 for some good purpose like a big plasma television. Now you have some money problems and fall into the trap of making minimum payments. While it’s possible to pay less, let’s say that you pay 2.5% every month. That 2.5% only represents a payment of $25, leaving you with a balance of $975. Based upon a 20% interest rate your finance charge for the next month will be around $20 and you’ll make another tiny payment that means you still owe at least $950 for that television. It’s easy to see that if you fall into the trap of making minimum payments, the payments can outlast the purchase. Needless to say, many people carry a lot more debt on credit cards and struggle to make the payments. While the minimum payment may give you some relief in the short term, it’s a very expensive proposition over time. Before making purchases on that credit card, think about alternatives. A good price on a purchase doesn’t mean much if you end up paying interest on the purchase amount for years and years. If you find that you're consistently having trouble making even your minimum payments, consider credit counseling. A credit counselor can help you figure out how to restructure your budget or negotiate lower monthly payments with your creditor. Or take a hard look at your spending habits and put yourself on budget. Budgeting doesn’t have to be painful and almost any action will be less painful than contending with ever deepening debt. Credit is valuable tool to help with financial security if used properly. Understand the terms of borrowing on credit and how the credit card payments are calculated should help you steer clear of long-term payment pain.