When your credit card bills lands on your doormat, it is tempting to simply glance at the minimum payment figure and not give a second thought to the total balance that is actually due. While this will lower your monthly budget quite considerably, it isn’t the smartest financial move that you can make. Here are seven reasons why failing to pay off your full balance each month is a recipe for disaster.

# 1- You’ll be paying off your debts for a very long time

There is one big reason why credit card companies don’t mind you only paying the minimum payment on your credit card bill, and this is because it increases the period over which you will be repaying your debt. This in turn affects how much interest they will earn from you. Because of this, many credit card companies are sneakily decreasing their minimum payments to fool unwitting customers into thinking that they are somehow getting a better deal.

To sum it up briefly, a debt of around $3000 will likely take over twenty years to fully pay off if you stick to the minimum payments. During this period, your interest will amount to even more than the original debt, so in effect they have made more than $6000 from your debt. Obviously, this gets worse if you have multiple credit cards as you will be paying massive interest on each of the debts. To gauge how long your debt could last, try Bankrate’s minimum payment calculator. Be warned though, you may get a big shock!

# 2 – You’re only really paying off the interest

As minimum payments are so low, they go towards the interest on your debt – rather than the debt itself. As a result, you’re never really touching the actual debt and are still accruing significant interest on top of the original debt.

# 3 – The added interest could be the tipping point

As mentioned in tip # 1, dragging out your repayments will increase your interest. If you happen to be near the limit on one or more of your cards, the additional interest that you incur could push your balance over the edge of your card’s limit, and this will result in yet more fees to pay.

# 4 – You may end up in negative amortization

Negative amortization occurs when your minimum payment doesn’t even cover your interest charges. This can be the case if your credit card has high interest but low minimum payments. If this happens to you, you will be stuck in a never-ending cycle in which you never actually pay off your debt as more and more interest is slapped on top of your original debt.

You don’t end need a particularly high balance for this to affect you. For example, if your balance was $3000 with a $20 minimum payment, your interest could easily be as much as five times your minimum payment. As your minimum payment doesn’t even remotely cover your interest, the additional interest gets added to your total debt and your balance constantly rises. To add insult to injury, your interest will increase along with your balance.

# 5 – Your interest rate could change without warning

Some credit companies have had bad press due to their tendency to change the interest rates without giving prior notice, especially if you happen to miss one of your minimum payments. Chase are becoming quite notorious for jacking up interest rates after missed minimum payments, and not bringing them down again afterwards. Basically, this is used as a good excuse to charge you more interest.

# 6 – It affects your credit score

Minimum payments only reduce your balance on a very gradual basis, which doesn’t do much for your credit score. Making higher repayments to clear a debt more quickly will improve your credit rating.

# 7 – You can be refused loans

If you’re only paying the bare minimum on your credit card bills, lenders may be much more reluctant to offer you loans or a mortgage. This can have a big impact if you plan to buy a house in the future, as lenders can easily decide that you are liable to default on repayments based on the fact that you’ve not been paying off much of your balance at any one time.

The Verdict

Having a credit card with a low minimum payment might sound fantastic, but it’s deceptive. If you only plan to pay the bare minimum each month, expect to be stuck with the debt for years to come, along with whopping interest fees on top of the original amount that you owe.

If you really can’t afford to pay off your balance in full every month, look for a credit card with a higher minimum payment. By that, I mean one that has a minimum payment of at least 5 to 10 per cent of your balance. This can be tricky as most credit card companies have realized the profits that they can make from having low minimum payments and have lowered them to 5 per cent or less on average. Even the credit card companies that have doubled their minimum payments are still typically less than 5 per cent.

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