“Spend as little as possible” might be a good mantra for budgeting, but it’s a terrible strategy for paying down your credit card balances.
When you make only the minimum payment on your credit card, you’re giving yourself temporary relief. But you’re also committing to paying more in interest charges later. That trade-off can get you into serious financial trouble over time, especially if your card charges a high interest rate.
If you pay the minimum toward your balance each month, here’s what you can expect to happen:
- Paying down your debt will take much longer.
- You’ll rack up bigger interest charges.
- Your credit score could take a hit.
Let’s take a look at why.
Paying down your debt will take much longer
When you pay just the minimum on your credit card, you’re telling your debt, “See ya next month.”
Credit card issuers tend to set minimum payment requirements at rock-bottom levels. You’ll generally owe either a fixed amount — often $25 — or a percentage of the balance, whichever’s greater. Some cards require you to pay only 1% or 2% of the balance each month, plus any fees and accrued interest. Making these small payments on time will let you avoid late fees, but you won’t make any real progress on paying down your balance.
See how it affects you: Look at the “Minimum Payment Warning” on your credit card bill. It includes a table that shows how much money and how many years you’ll need to pay off your balance if you pay only the minimum each month. You’ll significantly shorten that period just by paying more.
“If you pay twice the amount of the minimum, that repayment period gets cut in half,” says Ed Mierzwinski, who lobbied for laws requiring these disclosures as the consumer program director of the U.S. Public Interest Research Group, a federation of nonprofits.
You’ll rack up bigger interest charges
Unless you’re using a 0% APR card, your interest charges will grow along with your balances. Make only the minimum payment, and you’ll barely wipe out last month’s interest. And if you keep charging items to the card, you’ll fall further and further behind.
“You’re running on a debt treadmill if you only make the minimum the payment,” Mierzwinski says. “You pay, and you pay, and you pay, and you never pay it off.”
See how it affects you: To estimate your interest charges, divide your card’s annual percentage rate by 12 and multiply it by your average balance. If your card has a 21% APR, for example, your monthly interest rate would be 1.75%, or 21% / 12. Multiply that by the balance you’re carrying. If you have a balance of, say, $10,000, you’d owe about $175 in interest next month if you only paid the minimum now.
You can start next month with less debt by paying more against your balance.
Your credit could take a hit
When your credit card balances climb, so does your credit utilization ratio, the percentage of your credit you’re using. And because your credit utilization ratio is a major factor in your credit score, high balances can badly damage your credit. That makes it harder to qualify for affordable loans and credit cards with the best terms. It can even affect your ability to find a job or rent an apartment, as employers and landlords commonly review applicants’ credit.
It’s best to use less than 30% of your credit limit on any given card. If you can use less, that’s even better.
See how it affects you: Use this calculator to determine your credit utilization ratio. If your debt is bumping up against your credit limit, focus on bringing down your balances as much as you can. If you feel squeezed for cash at the end of the month, try paying your credit card bill right after payday. Or if you’re able, volunteer for more shifts at work and put the extra cash toward your debt. To see how your credit utilization ratio impact your credit, check your free credit score on NerdWallet.
If you can’t afford more than the minimum, ask for help
Paying the minimum is better than racking up late fees. And because late payments can damage your credit score, paying at least the minimum is essential.
But you shouldn’t do it forever. If your debt totals more than half your annual income, you can’t pay it off within five years, and it’s a source of major stress in your life, you might want to consider bankruptcy. Consult a bankruptcy attorney to learn more about your options.
But if you can find a way to pay more than the minimum, do it. Deal with your debt now instead of putting it off until later.