The Danger Of Paying Only Your Credit Card Minimum Requirement
If you own a credit card, you need to be warned about something: make sure that you will stay clear of the credit card minimum. When you get your monthly billing statement, you will see in there a box labelled minimum payment and besides that, you will see a small amount of money. This amount is usually a lot smaller than the total bill.
That is the amount that you need to stay away from.
Allow me to explain that further:
When you use your card, you are not required to pay everything back. You can choose to pay the minimum of the debt – which is just a percentage of what you really owe. This is actually a guide.
The credit card minimum is calculated based on the outstanding balance, fees, and interest rates. You have to pay at least this amount to keep yourself away from defaulting on the credit card debt.
While there is nothing wrong about this minimum amount, your choice to stick to this payment method will eventually put you in danger of accumulating a lot of debt.
What happens if you pay only the minimum on your credit card?
Before we enumerate what happens if you only pay the minimum payment requirement of your credit card balance, let us use the calculator from Citibank to make certain assumptions.
Let us assume that you have HK$10,000 worth of credit card balance. We can also assume that your monthly interest rate is 2.75% – this is actually a small estimate as some monthly rates can reach up to 3% to 4%. Credit cards are quite notorious for their high interest rate.
With these details, we can assume that your initial minimum payment will be HK$441 (this is based on the minimum payment calculation of Citibank). If you pay only the minimum of HK$441, you will carry over a balance of HK$9,559 to the next billing cycle.
Assuming that you will no longer use the credit card, the minimum payment requirement will get smaller. If you stick to that amount, it will take you 182 months to completely pay off the debt. Not only that, it will cost you a total of HK$27,438. Since your debt is only HK$10,000, you actually paid HK$17,438 in interest.
Imagine if you stopped sticking to the minimum and instead, consistently pay HK$441 each month. Do you know how long it will take you to pay back the loan? 36 months! Apart from that, you will only pay HK$15,880 until the maturity of the debt. Overall, you only paid HK$5,880 on interest.
If you pay even more than that, like a consistent HK$500 each month, you can pay your credit card balance even faster.
As you can see, here are the disadvantages of sticking to the credit card minimum:
- High debt-to-income ratio. Sticking to the minimum payment will keep your debt level high. As the balance is carried over to the next month, interest, fees, and charges are capitalized into it. Usually, the interest and charges are based on your balance. If you have a high balance, everything else will be high as well.
- Higher interest paid. As mentioned, your interest will be calculated based on your current balance. If you keep your balance high by paying only the minimum requirement, the interest that will be capitalized into the debt will be high as well.
- Longer term. Since you are basically just taking nibbles out of your credit card debt, it will take you a very long time to finish paying it off.
- Lower credit score. If your debt-to-income ratio is consistently high, that can affect your credit score. According to the Hong Kong Monetary Authority, a credit card issuer can raise their interest even if you never miss a payment. A low credit score can be a valid point for them to raise your rates. If the interest is higher, your payments will be higher too.
- More stress. Debt has this effect on us wherein we feel more stressed because of the mounting financial obligations that credit cards can bring. Unless you can completely pay off the debt, you will always feel anxious about your financial position.
- Wasted financial opportunities. Imagine the money you wasted paying more than $17,000 on interest. That could have bought you a relaxing holiday or a nice furniture or appliance at home.
All of these are caused by your decision to stick to the credit card minimum requirement.
Tips to pay more than the minimum of your credit cards
While sticking to the minimum will keep you from defaulting on your credit card debt payments, it is not enough to improve your finances. You have to add more – as much as your budget can afford. Here are tips that will help you pay more than the minimum requirement.
- Always budget your credit card purchases. This will ensure that you will have the cash to pay your balance in full when the billing statement comes.
- Pay off the balance within the grace period. According to the data from gov, you can enjoy an interest-free credit card purchase if you pay within the grace period of the billing cycle. This is usually between the date of your purchase and the due date of the billing statement that includes that purchase.
- Try to negotiate your interest rate. If you have a good credit score or you displayed good payment behaviour, you can negotiate with the creditor to lower your interest rate. Lowering your interest rate will help you lower the minimum payment. This will help you get the extra money to pay more than the credit card minimum.
If there is one rule that you need to follow, it is to never pay only the minimum of your card. Using your credit card wisely is also a good move. You have to understand that your card poses a lot of temptation to overspend.
After all, it can feel like an extension of your wallet. We all know that this is not true. You need to know your financial position so you will understand what you can afford and the expenses that you should let go.
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