With a lot of people facing increased financing pressure, should you be paying off your balance vs. making minimum payments?
Ideally, credit card balances should be paid in full each month. Many consumers, for whatever reason, can’t always do this. If you have a financial crisis or come up short when your credit card bill comes due, you’ll most likely make the minimum payment and carry the balance through to the next month.
Consider this example: Let’s say you had to replace your water heater suddenly and had to charge the purchase to your card. At the end of the month, that $450 comes due but you can’t pay the full amount. By making the minimum payment (usually 2-10% of the balance) you may have a little more cash to spend but it will cost you. If your minimum payments are 3% of your balance you would pay $13.50 per month. That would free up a lot of cash, right?
Wrong. By making the minimum payment each month, it will take you nearly 4 years to pay off the debt and the credit card company will charge you (at an average of 14%) $165.46! It would be a little better to make a flat payment of $50 per month, extending the loan for ten months and only paying $28.26 in interest but you can see that carrying a balance on a credit card is very costly. This is why credit card issuers allow minimum paymentsÃ¢â‚¬â€it’s very profitable for them!
Minimum payments can occasionally help in times of short-term financial straits but paying off your credit card balance every month is much more economical.
This calculator below should help you work out some scenarios.