Credit > Minimum Payments (1) The minimum payment is the minimum amount a cardholder must pay to keep the account from falling delinquent. If you carry credit card balances from month to month, you must understand that minimum payment means maximum expense. In most cases, if you make only the minimum payment, the majority of your money will go toward interest (revenue for the credit card company) and a relatively small amount of your money will be applied toward principal (the amount that you borrowed). The required minimum payment is calculated by taking a percentage of the existing balance (usually 2%-3%), so the minimum payment decreases as the balance on the account decreases. Minimum payments tempt consumers to procrastinate by not paying immediately for purchases. The ability to make minimum payments gives consumers the false impression that they are in control of their finances. This causes unsuspecting or financially troubled consumers to continue to pay a disproportionately large amount of their payment towards interest, which aids in the long and costly downward spiral into unmanageable debt. By making minimum payments, consumers increase the cost of interest accrual because they do not make significant decreases in the balances on which interest compounds and continues to “revolve.” A debtor’s inability to pay more than their minimum payment and break the long spiraling effect is often referred to as “debtors’ prison.” If credit card companies had their wish, everyone would pay minimum payments, which would enable them to make exorbitant amounts of money through extended repayment periods. Paying as much as possible toward credit card balances and reducing interest rates will enable you to get out of debt faster. |
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