Most credit cards have a minimum payment requirement, the least you must pay to keep the account in good standing. Paying more is always an option, but paying less would mean fees and a strike on your credit report. It's always wise to pay at least the minimum before the due date, but it's best to pay more.
What Are Minimum Payments?
A minimum payment is generally calculated based on a flat percentage of your total balance. Some credit card companies will add any new interest and fees and past due amounts to the minimum payment requirements.
Some credit card companies require you to pay a fixed amount that stays the same each month; others base it on your current balance. It would be best to learn about these requirements before you open an account.
You can learn your minimum payment for any account you have by looking at your statement or logging into your account. Doing so will allow you to see what the lender requires in payment from you this month.
The Cost of Making Only Minimum Payments
The higher your credit card balance, the higher your minimum payment is. However, even if that payment looks pretty high, it's tough to get ahead on paying off your debt if you only make this payment. If you pay only the minimum payment, it will take you years to pay off the debt.
A minimum payment warning is likely on your statement, for example. That will include a table or chart showing how long it will take to pay your debt off based on your payment. The more you pay, the sooner you pay off your debt and the more money you save.
The longer you hold onto the debt, the more interest you pay over the loan term. That increases your costs even if you do not buy anything else. However, if you paid twice your minimum monthly payment, you could cut the time to pay off your debt in half. As a result, you'll pay less interest over the pay-off term, which goes straight to your bottom line.
Staying Out of the Cycle of Debt
The cycle of debt is problematic.
- You make a credit card purchase, planning to pay it off quickly.
You don't do that, and interest rates apply. - You make the minimum payment on the debt. Still, your balance drops a small amount because most of your minimum payment goes to pay interest on the debt.
- You pay only the minimum payment again and again. Yet your debt balance never seems to go down by much.
The best way to stay out of the cycle of debt is to make payments on time to avoid fees, to limit how much credit you use, and to pay more than the minimum – as much as you can – from month-to-month.
Tips for Paying Off Debt
How can you effectively pay off your debt and break free from the cycle of debt? Take into account these valuable tips:
- Keep track of all your expenses: Understanding how much you're spending is crucial. By documenting all your expenditures, you can identify areas where you can cut back and save money.
- Make informed purchasing decisions: Whenever you make a purchase, strive to make the best possible choice. That involves ensuring you get the best price and actively seeking ways to reduce expenses.
- Build an emergency fund: Setting aside money in an emergency account is essential. That ensures that you have a financial buffer in case of unexpected circumstances, allowing you to avoid relying on credit during emergencies.
Creating a Debt Repayment Plan
A debt repayment plan is a tool that can help you create a map to help you know how much you should pay on your debt, one step at a time. Most people will find that debt repayment plans – like the debt snowball method – help you to focus on using your money wisely while also allowing you to meet your financial obligations.
The basics start with a budget. Then, determine which account to tackle first with the most "extra" you can, over and above the minimum payment. Doing this helps to reduce your costs over the long term and helps you to get out of debt sooner.