When it comes to credit cards, there is a right way and a wrong way to use them. Unfortunately, there are plenty of people out there, especially younger individuals, who find themselves buried under a mountain of credit card debt that seems virtually impossible to dig out of. In many cases, this is because a person spent more money than they could realistically afford to pay back and found themselves making only the minimum payment. But, why is making only the minimum payment on a credit card so dangerous?
First of all, it’s important to understand the credit card companies set a low minimum monthly payment requirement so that large purchases don’t seem quite so intimidating. For example, an individual can make a purchase of up to $5000 of the credit card and find that their monthly minimum payment is only around $150 a month. Unfortunately, if an individual only makes the minimum payment, the amount that they will end up paying once the debt has been completely paid off will be substantially higher.
Taking the example of a $5000 debt on a credit card with a $150 minimum monthly payment, the end cost if only minimum payments are made with an interest rate of 24% will be an astonishing $14,090 and would take 21 years to eliminate. That means that the final amount a person will end up paying is almost 3 times the amount of the purchase that they made originally.
Of course, the interest rate that is being charged by the credit card company will play a huge role in how long it takes to pay off a debt making only minimum payments. In the example stated above, an interest rate of 10% would mean that the debt would be paid off in just over three years. Recent changes in the way that credit card companies are able to do business have made it easier for consumers to understand how long it will take to pay off the debt if they only make minimum payments.
An unfortunate side effect of making minimum payments on a significant amount of credit card debt is that it makes it easy for an individual to accumulate even more debt. If a person is only making a minimum payment each and every month but continues to use their credit card, they may find that it is harder and harder to finally get the card paid off. While the best way to handle a credit card is to pay the balance off each month, that is simply not possible in some cases. For example, if an individual uses their card to cover an unexpected expense, the minimum payment may be all that they are able to afford. In order to prevent debt from getting out of control, an individual should stop using their card until they have it paid off.
Although making only the minimum payment can be quite dangerous, it is important to keep in mind that not making a payment at all is an even worse idea as the interest rate is likely to skyrocket and additional fees will cause the debt to go up even higher.