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When you’re balancing the family budget, the minimum payment on credit cards and line of credit loans can be alluring.
It’s a chance to keep your account in good standing for less, freeing up your cash for more important purchases, like fixing the leaking faucet or buying your daughter new cleats for soccer.
Sound too good to be true? There’s always a catch, and the minimum payment is no exception.
Here’s why you want to pay more than the minimum as often as you can!
1. Frees Up Your Available Limit
Paying off your full outstanding balance does “future you” a favor. By resetting your account balance to zero, you’ve regained your full line of credit limit to use as you need it. This will come in handy when an unexpected emergency expense comes your way again. If you need to take your car into the shop for an unscheduled diagnostic check, you can put this repair on your online line of credit.
2. Avoid Extra Interest and Finance Charges
It doesn’t matter what financial institution holds your account. Whether you have a line of credit with one of the biggest banks or online loans direct lenders, financial institutions will apply interest and finance charges. That’s just the way borrowing works.
Whenever you make the minimum payment, what you’re really doing is rolling over the remaining balance into the next billing statement where it will be subject to finance charges and interest.
That means you’ll add on debt every time you rely on the minimum, even if you don’t put another charge on the account.
3. Pay Off Debt in a Meaningful Way
A minimum payment is a slow way of paying off what you owe. Really, really slow.
The Balance crunched the numbers. If you had $5,000 owing on your account at 21.21% APR, it would take you 30 years to pay it off. Over three decades, you’d pay more than $21,000 in finance charges.
Use a payment calculator to see how long it will take you to strike debt from your name by making the minimum. Fiddle around with these numbers. You’ll see that you can pay off your debt faster when you pay more toward your balance.
4. Lower Utilization Ratio
Your utilization ratio shows credit reporting agencies how much of your available limits you’re using at any given time. They want to see a low ratio because it shows you aren’t maxing out your credit without a plan to repay it.
Most financial advisors recommend using 30% or less of your limits, but the lower you go, the better it is for your credit history.
5. Encourages You to Budget Better
The minimum payment has a sneaky power of convincing you that your purchase is more affordable than it really is. You can put the new PS4 for your kids on your line, even though you don’t have the cash to pay it off in full. But as you now know, this is an expensive way to purchase things. Interest pushes up the price tag of anything you can’t afford.
Once you’re serious about paying off debt, managing interest, and improving your credit, you’ll be a little more cautious about what you charge to your line.
Only charge what you can realistically pay off, if not by the next billing statement, then as soon as possible. This habit will help you pay more than the minimum and gain these five perks.
