October 06, 2022

Eric Shepperd

Symple Lending explains what happens when you make minimum payments on credit card debt

Your credit card’s minimum payment is the smallest amount you can pay without being considered late-paying. When your income is a little too short for all your bills on occasion, having this minimum to fall back on can seem like a lifesaver. However, there are risks lurking inside this apparent benefit; you need to know what paying the minimum really means if you’re going to avoid the pitfalls.

Why You Might Need the Minimum Sometimes

There may be circumstances that make it necessary for you to pay just the minimum on your credit balance. Suppose you suddenly lost your job or had a major medical expense that took a big bite out of your savings. It’s understandable you might need to temporarily fall back on the minimum payment. If money is extra-tight as your credit card due date approaches, the minimum can allow you to make an acceptable payment on time. This saves your account from being hit by late fees and keeps your account active.

While your credit score can be harmed by paying only the minimum as we’ll discuss later, there is one way that minimum payments can actually protect your credit rating. As long as you’re paying at least the minimum on time, you’ll be shielded from having a record of late payment that would damage your credit. While avoiding late payment is a policy that Symple Lending supports, paying only the minimum on your credit card is a poor long-term strategy.

Problems with Paying the Minimum

Relying on the minimum payment each month can hurt you financially in several ways. First, paying only the minimum on your credit card makes your debt more expensive thanks to interest charges applied to your unpaid balance. Think of it as paying more than the actual price for everything you charged on your card. The more you can pay each month, the fewer interest charges you’ll end up paying overall.

Another negative effect of minimum payments is staying in debt longer. Symple Lending recommends paying off credit card balances as quickly as you can, but paying only the minimum undermines this goal. Even if you never charged anything else to that card, making just the minimum payment means that paying off the balance will take years. This is because the minimum payment mostly pays interest; very little of that payment goes toward reducing the principal balance. Dragging credit card debt around for years is stressful, and it also restricts your ability to do other things with your money. It’s like you can’t spend your money on the present or future because you’re still paying off the past.

On top of all that, your credit score will likely suffer if your balance continues to go up over time. Since paying the minimum does so little to reduce your balance, you could actually see your balance increase rather than decrease if you’re still charging to the card. Credit bureaus and potential creditors compare the total amount of credit available to you against the total amount you are currently using to derive a credit utilization ratio that affects your rating. The more you owe compared to your available credit, the worse your credit score will eventually be.

Why Paying the Minimum Hurts – Compounding

Symple Lending advises borrowers to look closely at the total cost of their debt; when you look at the fine print, you’ll learn how fast compound interest can take your card balance from bad to worse. Compound interest means you don’t just pay interest on the principal, but also on interest charges themselves that are added to your balance. Interest can be compounded in several ways, but credit cards usually compound daily, and that makes balances grow quickly.

Each day, interest is charged against your average daily balance. If no payment posted to your account yesterday, then today’s balance has its interest charges calculated on the basis of an even higher average balance that includes yesterday’s interest charges. Remember, that’s what compound interest means: interest charged to interest as well as the principal. Carrying a balance also eliminates the grace period before the due date when interest is not charged. That translates into interest charges continually building without a break even when you’re doing your best to pay off your debt.

Escaping Unmanageable Credit Card Debt

Once credit card balances become so high that you struggle to even make the minimum payment, you have a few options available for getting out of debt. Some people use a personal loan to pay off credit and other debts, which can work if you get a lower interest rate on the loan than on the card. Debt consolidation loans are an even more targeted strategy, helping you get credit cards and other loans combined into one monthly payment. Debt consolidation could both reduce and streamline your monthly bills, possibly empowering you to pay off debt faster. Symple Lending endorses simplifying and consolidating debts wherever you can. If you don’t act fast enough to prevent your debt from getting out of control, you may have to file for bankruptcy as a last resort.