Why paying the minimum due is a bad idea

Let’s suppose that you go a little overboard with your shopping one week. Maybe the mall had a slew of really great sales and before you know it you charged up a small fortune on your credit card. Even though your closet is nice and stocked with some great clothes, you dread the arrival of your credit card statement because you know that this was a doozy of a shopping experience and you can only imagine how much your payment will be.

The bill arrives and you open it up while bracing yourself for the worst. How will you afford this payment? Will you have to eat peanut butter and jelly for the rest of the month just to make ends meet? Oh, the humanity!

Then you get a look at your minimum payment due, and it’s less than it costs you to fill up your gas tank.

At first you think it’s a typo, and then you realize that your impulse shopping actually didn’t affect you all that much, at least not in the short term. What is your first impulse? Make the minimum payment, promise yourself that you’ll make a larger payment later, and then maybe even go shopping again because, after all, it’s apparent that you can spend with reckless abandon and not have it change much at all when it comes time to pay the bills.

Let’s get straight what a minimum payment isn’t.

A minimum payment is NOT a credit card company’s friendly suggestion of what you should pay according to how much they think you should budget for your bills.

A minimum payment is NOT an amount created by the credit card company in an attempt to get your balance paid off in a reasonable amount of time.

A minimum payment is NOT the payment you should be making.

You have probably heard it all before: Make the minimum payments on a credit card and you’ll be paying off the same $1000 for ten billion years, or something like that. The truth of the matter is that a minimum payment is just enough to keep you involved in your debt without really putting a dent into your balance.

In other words, making only the minimum payment will keep you in debt. It’s what the credit card companies want you to do. Never mind that a low minimum monthly payment makes you feel more comfortable psychologically about incurring more debt because you feel as though you can afford it. Credit card companies want you to keep making the minimum payment because they know if you get into this pattern they are going to earn a substantial amount of interest from you.

When it makes sense:

Sometimes making a minimum payment makes sense. If you’re concentrating on paying down your bills one debt at a time, making minimum payments on all the other cards will keep you current while allowing you to throw more money toward the bill you’re trying to pay off.

There are also some times when money is stretched tight – medical emergencies, accidents, during a job loss – when a minimum payment may seem like a Godsend. This is when you’re most vulnerable to falling into the debt trap and why you should have an emergency fund

Go ahead and make the minimum payment during these times if you have to, but DON’T make it a a habit. Your goal should be to eventually pay your credit card debt down and get it paid off so you aren’t perpetually in debt. You will never achieve this goal if you only pay the minimum each month…at least, not for ten billion years or so!

One thought on “Why paying the minimum due is a bad idea”

  1. Yeah MYC, I think it is psychological. The word “minimum” sounds innocuous; small, easy, safe, etc. When you see that word on your credit card statement, you feel good about paying that vs. your mortgage/rent, groceries, utility bills, etc. I think most people know that they will stay in debt for a long time making minimum payments, but it doesn’t feel bad because of the psychological feel of the word “minimum”. That is my guess anyway. Most people don’t know how to calculate interest. On a 1000 balance at 18%, that’s 1.5% for a month or 15$ in interest. Then your minimum payment is 20$, and you only pay 5$ towards interest, which means you won’t pay off the balance for nearly 200 months! (not quite 10 billion years, but still a long time! :)

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