These days credit cards become a common thing – everyone has one of them in their wallet. We purchase goods using the card on a daily basis until we reach the limit. But when it comes to paying the monthly bill payment of credit card, some cardholders only make a minimum payment. Well, it’s good to keep your account standing and to escape from the late payment fee, but that’s all you will get. You can’t escape from the pool of debt. Not only that, but you also have to face lots of other consequences. Might be wondering what are those? That’s why we are here to learn what happens when you make a minimum payment of Credit card?
If you are a credit cardholder and experiencing a financial emergency, making a minimum payment is like a short-term strategy. It’s more likely to be dragged into the black hole of debt. So, in any circumstance, you should not use this method for your credit card payment. Not only for a short period of time, but you also have to avoid using it for a longer time if you don’t want to get any serious financial trouble in the future.
So, why cardholders must avoid the minimum payment? Go through the whole article to find out the answer.
What is the Credit Card Minimum Payment Means?
Minimum credit card payment means the lowest payment required on your statement balance. In other words, it’s the least amount of money that you pay for using a credit card every month for maintaining your account. When you only make a minimum payment, then somehow, you can escape from the late fee. You are only meeting some requirements as cardholders and maintaining a positive payment history on your report. But, it doesn’t mean that you completely fulfill the term and conditions of a credit card.
Making a minimum payment somehow can cover your fees but can hit you with the huge pain. By only making a minimum payment is like stacking your money of debt, according to Bruce McClary at National Federation for Credit Counseling. Slowly, slowly you are maximizing your debt limit, which is not a good sign for your credit card health. On the one hand, you are stretching your credit debt, and on the other hand, your interest rate is also slowly growing.
Let’s say minimum payment is like a short-term method to deal with your financial condition. But sooner or later, you have to deal; you have to deal with the consequences. On the other hand, if you are worried about the credit score, then don’t. Besides, Minimum payment won’t affect the credit score, so somehow, it’s a good thing for your credit history. However, we strongly recommend the cardholders to pay more than a minimum if they don’t want to pull by the worst financial black hole.
Besides, making a limited minimum payment to cover your monthly installment is a costly way to maintain your financial debt. It’s only a short-term solution; you cannot implement it for a long time. So pay your monthly bills on time and give some breathing space for your budget.
How Your Minimum Credit Card Payment is Calculated?
If you are only making a minimum payment on a monthly basis, then you must know how your minimum credit payment is calculated. This way, you can make a decision on how long you should continue this process.
Well, the calculation of minimum payment is differing from bank to bank. But in most of cases, you have to pay 4% of your total balance. The credit card vendors or a bank calculate your monthly statement by the following percentage, and that will be your minimum amount which you have to pay.
Suppose, if your monthly statement balance is $5,000, and then your minimum balance will be $200 (4% of your balance). Likewise, if your monthly credit card statement is $400, then your minimum payment amount will be $16. Therefore, the larger balance, the more your monthly minimum payment.
The minimum due is usually about 2% to 5% of your credit card balance. Besides, I already said it before, it differs from bank to bank for the charge of the minimum payment.
Likewise, in some cases, if you only pay a small amount of money, then you may also charge with the interest fee of your remaining balance. So, this is not a perfect idea for your credit card payment.
What Happens If You Forget Your Minimum Payment?
Suppose you are out for vacation, and your credit card payment due date is coming. You are so busy enjoying your travel and miss to make a minimum monthly credit card payment, what happens next? Well, in that case, you can be charged with the late payment fee. You can even lose any promotional interest rate (low interest), which you have on your credit card balance. Well, that’s a huge loss for the cardholder.
Besides, if cardholders miss their two minimum payments in a row, then the credit card company can raise the interest rate to the penalty rate.
Likewise, there is another major impact on the late minimum payment. Like if your minimum payment is late than 30 days, your credit card company will report about this activity to credit bureaus. The bureaus will save your credit report for seven years. Due to this reason, you might lose your credit score, especially in the 1st few months after the late payment report. Losing your credit score can cause a lot of trouble for you in the future.
If you constantly forget your minimum payment, you might end up paying more and more. Because your late payment will stack up like a tree (like debt), so you have to cut down the tree. Otherwise, it can destroy you when it reaches the maximum level. Not only that, but you also have to pay the current and missed minimum payment. Either this way or that way, it will affect you more and more.
What Happens When You Make a Minimum Payment of Your Credit Card?
Now, you have already known about the credit card minimum payment and how does it work from the above topic. If you haven’t read that, scroll upward. Otherwise, keep reading.
We only give a little bit of hints about what will happen when you make a minimum payment of credit card in the above topics. But down here learn in detail about the consequences of the minimum payment of credit card.
Your Debt Will Take Much Longer to Complete
A credit card helps us a lot while purchasing a good even though we didn’t have any cash. A credit card issuer charges some interest like 2% to 5% for using the card every month. While paying these interests on time can avoid the late fee charges. But your debt still will not be completed because you only pay a certain percentage. Do you don’t want to complete all your credit card debt?
Some people also may not know how much minimum payment they should pay a month. If you are among them, then look for a Minimum Payment Warning on your credit card bill. There, you can see how much money and how many years cardholders need to complete the payment if cardholders continuously make a minimum payment in a month. If you don’t want to see the warning of the minimum payment, then do pay more on a regular basis.
According to Ed Mierzwinski, consumer program director of U.S Public Interest Research Group says, when you pay more amount of minimum, your repayment will get cut in half.
Therefore, always pay more than the usual amount to lower your debt credit balance.
You Will Drown Into the Interest Charges
A credit card gives you both benefits and drawbacks. You can buy as much as goods until you reach the credit limit, but you have to pay interest at the end of each month. Unless you use the 0% APR card, you can’t escape from the interest charge.
When cardholders limit their purchase, they can save money to pay the interest charge, but if they don’t, they will drown into the pool of interest. They can barely wipe out the interest rate if they keep on purchasing the goods.
The more interest you will have, the more you are likely to be in a desert of debt. You cannot find the escape route once you get lost in debt. So, the minimum payment is somehow good to escape from the late payment fee but not from the debt. It feels like pouring a bucket of water in a hot desert, you try and try and try to make a pool, but it never ends. Debt is also like that unless you become a responsible cardholder.
Besides, if you want to estimate your interest charges, then divide your credit card annual percentage rate by 2. After that, multiply it by your average card balance. In other words, suppose your APR is 21%, you only pay a minimum, and if you have a balance of $5,000, then your interest rate will be about $87.5 a month.
So, why not pay more and reduce the interest charge which you are paying until now?
Your Credit Score Could Be Affected
Your credit card plays a vital role in making a good credit score. If you only pay the minimum with the increasing interest charge, then think, how will your report be? More interest charges are shown in your report; more your credit score likely to decrease or bad. If you can’t properly utilize the ratio between the payment and interest, you are hurting your credit score.
When your credit score goes down or becomes poor, you cannot get a loan, and venders will not trust you. Why they trust the poor credit score? If you even cannot improve your credit score. Not only that, but you also cannot rent an apartment, find a job, and more if your credit falls down.
Besides, if your credit limit is going down, then try to focus on minimizing your balance. You can even make a payment of your credit card bill right after the payday. After doing this, you can check the impact on your credit utilization.
Healthy Habit For Your Credit Card Life
A healthy habit is important for everyone, which hit us with a lot of benefits in the future. So, when it comes to making our credit card healthy, here are a few tips which cardholders can implement. Likewise, it also helps if you are trying to improve your credit card payment report to escape from the debt.
Use Your Credit Card Wisely
If you use your card wisely and purchase the only essential thing, then you can save a lot of money on your card. This also shows that you are a responsible cardholder who knows how to handle a credit card. You can also use another method like holding your credit card spending. In other words, use cash for purchasing goods instead of credit cards until you clear all your debt.
Take Advantage of Balance Transfer Offers
An advantage in balance transfer means some credit cards offer balance transfer with 0% interest charge. It usually lasts long about 6 to 10 months, but the time is limited. So, within those times, you can transfer your old credit card balance to your new one without paying any interest. But remember to transfer money before the offers expire.
Select a Low-Interest Credit Card
When you choose the low-interest rate, it will be a lot easier to clear your debt of credit card. You don’t have to pay extra-high money, which helps you to develop a better credit score. Besides, you even don’t have to choose a minimum payment method of a credit card. That’s why because with low interest, it will not be that much difficult to pay the monthly credit bills.
Conclusion
Making a minimum payment is like running in a treadmill of debt and high interest. You pay and pay but reach nowhere. So why not pay more, make a limited purchase and avoid the high interest and debt? We don’t recommend the cardholders to use the minimum payment strategy when it comes to the financial situation.
Become debt-free cardholders in a month by paying more and save a thousand bucks.
How you like to pay your credit card bills? Minimum payment or full? Let us hear your thoughts in the comment section.
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