Paying the minimum payment on your credit card each month will cost you the maximum amount of money
Credit cards can be a useful financial tool. Pay it off in full each month and you can enjoy up to 50 days or so of interest-free credit. Make a large purchase and clear it down over a few months and it can be cheaper than a personal loan for the same amount.
The trouble is, those kinds of behaviours don’t make the credit card company much money. Interest charges are effectively their profit margin, so it’s in their “interest” to make you pay more… interest!
Here’s one I prepared earlier
So here’s an example of how paying the minimum balance each month can avoid an immediate problem, but store up an expensive long-term one.
If you have a £1,000 credit card balance that’s subject to the national average purchase interest rate of 19%, and you only make the minimum payment each month (usually 1%), it will take you 18 years and 5 months to pay off that £1,000, and it will have cost you a whopping £1,271 in interest! That means you’ll have handed over a total of £2,271 and been in debt for nearly 2 decades.
Ditch the minimum, and pay it off at a constant £20 each month and you’ll be clear in 7 years 7 months, and that £1,000 will cost you £807 in interest. Not great, but a lot better than sticking with the minimum.
If you can stretch that constant monthly payment to £50 then your £1,000 will be gone in just 2 years for a total cost of £1,191.
If you want to clear the debt in exactly a year (perhaps you’ve spent out on Christmas?) then you’ll need to pay that £1,000 off at £95 a month, and the total cost would be £1,093.
Of course all these examples assume you don’t put any additional spending on the card at all over the repayment periods…
Yes, paying just the minimum each month keeps the reminder letters away, but it will cost you dearly in the long run! Always try and pay more than the minimum balance on your credit card in order to pay less interest overall. If you find yourself getting to the stage where you feel that the minimum payment is going to become all you can afford to pay then it’s definitely time to seek some debt advice.
Thinking about paying the minimum repayment, even only for one month to “tide you over” is an early warning sign that you need to take a good look at your finances and see what you can do to get yourself in a healthier budget position.