In today’s busy world, credit cards are now commonplace due to their convenience, flexibility, and rewards. Many individuals depend on credit cards for daily spending, travel, and to cover any unexpected costs. Credit cards have become a popular tool for funding a wide range of entertainment activities like subscription services, dining out, buying movie tickets, and gaming and gambling. Gambling from home is incredibly convenient, with many online sites usually accepting credit cards, making it easy to fund your account and start playing. Sergio Zammit explains that credit cards are one of the most convenient and secure payment methods to use at online casinos. With a huge range of ways to spend using a credit card, there is no shortage of things to buy or experiences to have. However, the question remains. Can credit card users simply pay the minimum payment each month?
According to a study from the Federal Reserve Bank of Atlanta, at least 77% of U.S. adults own at least one credit card. Additionally, credit cards were the most-used payment method in 2022, and at least 47% of credit cardholders currently have an outstanding debt that they are maintaining from one month to the next. At the same time, it may seem like an easy way to manage credit card expenses, but relying on a minimum payment should not be a long-term strategy for paying off credit card debt.
The purpose of credit card minimum payments is to provide a small but manageable amount that cardholders must pay to keep their account in good standing. These minimum payments are typically calculated as a percentage of the balance, which could be anywhere from 1% to 4$ of the total balance, plus the interest and fees.
Paying the minimum payment will take much longer to pay off the balance, often by several years, resulting in paying significantly more in total interest charges over time. Most financial analysts advise paying more than the minimum payment, preferably the full statement balance, to avoid interest charges and pay off debt faster. However, the high cost of living has significantly impacted credit card usage and repayment. If you can only afford the minimum, it’s a much better option than missing payments.
Credit card spending increased, especially among families trying to cover any financial shortfalls. Most individuals are turning to credit cards to cover monthly expenses. Relying on credit cards to make ends meet creates a dangerous cycle of debt and financial instability, resulting in escalating interest and fees.
Making the minimum payment on your credit card each month is not a bad thing. It’s vital to avoid late fees, penalties, and damage to your credit score. However, relying solely on a minimum payment long-term is not ideal for several reasons.
Credit card bills usually have three amounts you can pay, the minimum due, the statement balance, and the current balance. Let’s say the minimum amount you pay is $20 per month, your balance is $1,000, and the balance accrues 20% interest. It will take you approximately seven years and a few months to pay off the balance. During that time, you will have paid a total of $1,480, with $480 being the interest charges alone. The longer you carry the balance and only make minimum payments, the more the interest will accrue.
If you only pay the minimum amount due on your credit card each month, the remaining balance will continue to accrue interest. This can result in a significant amount of interest charges over time and can make it quite difficult to pay off the debt. Interest is charged daily on the remaining balance and the daily periodic rate is calculated by dividing the annual percentage rate (APR) by 365 days. So should your card have a 20% APR, the DPR is 0.0548%. These interest charges are added to your balance every day.
The minimum payment is usually very low, often between 1% and 2% of the balance, so your payment actually goes towards interest and to the actual debt. Paying only the minimum allows interest to accrue and makes it challenging to ever pay off the balance.
Regardless of paying only the minimum payment on your credit card, it can negatively impact your credit score, both positively and negatively.
Positive impact: Paying the minimum amount by the due date every month shows a history of making your payments on time. This is one of the most important factors in credit scoring models and assists with maintaining a good payment history.
Negative impact: Only making the minimum payment keeps your credit utilization ratio higher for much longer. Credit utilization is the amount of available credit you are using and accounts for at least 30% of your FICO score. Keeping the utilization below 30% is recommended to maintain a good score.
While minimum payments keep your credit card account up-to-date, paying more whenever possible, saves you money. Even the smallest of increases above the minimum makes a massive difference over time.
When you are only paying for the minimum, a large portion of your payment covers the interest charges rather than the balance. Paying more than the minimum reduces the amount of interest you accrue over time, resulting in you saving hundreds of dollars.
Paying balance faster keeps your credit utilization ratio lower, improving your credit score. A low credit utilization ratio shows lenders that you are not overextended on credit and you can manage your debt responsibility. Furthermore, it can save you money. The lower your credit utilization, the less interest you will pay over time.
While paying the minimum payment is crucial, paying more whenever possible can help you build an emergency fund and have a little extra to treat yourself, whether it be a spa day, those sneakers you’ve had your eye on, or spending the night gaming with friends at an online casino. As long as you take a balanced approach, you can achieve your financial goals of becoming debt-free, building your savings, and enjoying guilt-free treats along the way.
