Why Pay More Than the Minimum?

3 reasons to pay more than the minimum

Turning It Around
••• Gary Waters/Ikon Images/Getty Images

It’s tempting to only pay the minimum on your credit card. Those small payments are easy to afford, so you feel like you’re in control of your finances (unless you have a ton of debt, and the minimum is ​all you can afford). You might even wonder why anybody would pay more than the minimum required payment.

Minimum payments are typically calculated as a percentage of your total balance, and a payment of 2 percent to 4 percent is common. Because those payments are so small, several problems arise when you go with the minimum.

1. You’ll Pay Interest

The first problem is that you’ll pay a lot of interest. Credit cards are expensive tools for borrowing, and you don’t want to keep a balance on a credit card for long. If you only pay the minimum, most of your monthly payment will be eaten up by interest costs, and you’ll only reduce your balance by a small amount.

To see a basic example of interest costs (and how much goes towards your balance with each payment) see how to calculate credit card payments. Use your current debt and payments as an example, and then try some what-if calculations. Use this online calculator to see the numbers in action.

2. You’ll Pay Forever

It might not actually take forever, but it’ll feel like those payments will be with you for the rest of your life. With minimum payments, paying off a card can easily take 10 years (or more). Again, you’re only making a small dent in your debt when you make small payments. You need to pay extra to accelerate the process.

Wouldn’t it be nice to be debt-free someday? Instead of making required payments that don’t do anything for you (except maintain a debt and help you avoid default), it’s better to have the ability to put money towards more rewarding goals that you choose to fund. You can build up retirement savings, a down payment for a house, or pay for a wedding with cash.

3. It’s Harder to Borrow

If you want to get another loan, you’re making things hard on yourself when you leave credit card debt lingering around. For example, you might want to borrow to buy a house or a car. Lenders evaluate your ability to repay and pull your credit, and it’s easy for them to see that you’re just barely paying off debt.

Income ratios: To get approved car or home loan, you need to show that you have income available to repay the loan. Lenders review your existing debt burden (how much you currently pay towards your debts each month) and evaluate if you’re able to afford additional payments. If you only pay the minimum required, you’ll have more debt, and that means you have less money available each month to pay off new loans (according to lender calculations). The result? You might not get the loan you want.

Credit scores: ​You’ll most likely have lower credit scores if you don’t pay off your cards. 30 percent of your FICO credit score comes from the “amounts owed” category: a measurement of how much total debt you have—and how much of your total available debt you’re currently using. If you don’t pay down your debts, it looks like you’re maxing out your cards, and more debt could put you over the edge. Credit scoring models don’t like to see high balances on revolving accounts. Keep your balances below 30 percent of your credit limit to avoid serious damage to your credit.

How to Pay off the Debt

If you’re ready to move beyond paying just the minimum, make a plan to get out of debt:

  1. Spend less (yes, it’s easier said than done).
  2. Pay more than the minimum—even $10 or $20 per month makes a difference, but more is better, especially if you have an emergency fund in place for surprises.
  3. Consolidate debts if you can save on interest costs (or use a promotional balance transfer offer if you can pay it all off within six to twelve months).
  4. Avoid the temptation to rack up debt (again) after you pay down your debts.

Credit cards aren’t necessarily bad. But bad things happen if you only pay the minimum each month. Credit cards can actually make everyday spending easier, and they’re often safer to use than debit cards. But it’s essential to pay off your entire balance every month.