Paying just the minimum on your credit card? Here’s why it’s risky

The aspect of personal finance that most people find most important is understanding how to manage payments on credit cards. While it may feel easy to pay the minimum amount due every month, it is important to understand the effects of doing so. This article covers the concept of minimum payments, their effects on your finances, and provides some practical tips on managing credit cards.

Understanding minimum payments

A minimum payment is the least amount you can pay by the due date on a credit card and continue to keep your account in good standing. Minimum payments are usually calculated as a percentage of total outstanding debt, usually 5% or more.

Pitfalls of paying only the minimum

• Increasing interest: Only making the minimum payment means the interest is calculated on the remainder of the balance, therefore the total amount owed can become quite large.
• Longer debt repayment: Consistently making minimum payments means that it will take longer to pay off the debt. This time frame may range from months to years, depending on the amount and interest rate.
• Negative credit rating: Large amounts may lead to increased credit utilisation which may also harm your credit rating. Lower credit ratings will harm future opportunities for loan eligibility and interest rates.

Benefits of paying the full balance

1. Preventing interest fees: You can avoid interest fees by paying your credit card off in full and only paying for what you charge to your card.
2. Better credit reliability: Paying bills off in full, along with utilisation being low, demonstrates a level of responsible credit use, which help your overall credit score and your financial situation.

Strategies for effective credit card management

• Budgeting: This allows you to pinpoint where you have potential to spend less during the budgeting cycle, thus freeing up additional cash to use to pay down credit cards.
• Paying higher-interest bills: Apply your efforts to pay down credit cards that have the highest interest bill first so you will pay less total interest and reduce the length of time.
• Automatic payments: Set up payments automatically so you do not incur late fees or impact your credit score.

In conclusion, it may seem adequate to simply keep the minimum due amount on the credit card, in order to keep it active and avoid penalties, this is not a good way to manage financial health. Interest continues to accumulate, it takes a long time to extinguish that debt, and it harms your credit score. These are all reasons to prioritise paying bills in full.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.