Why you should pay more than the minimum balance on your credit card

Credit cards offer convenience and flexibility, and some even offer rewards like cash back. They make it possible to afford large purchases when you don’t necessarily have the cash on hand. 

Throughout a one-month billing cycle, you can use your card to make purchases up to a credit limit. If you pay your bill in full, your balance resets to zero and you can charge up to the limit again. 

Credit cards also allow you to pay off your balance over time while still using your card. In other words, you can take on short-term debt, which isn’t necessarily a bad thing if you’re able to pay that debt off. 

How to get into credit card debt

If you don’t pay your bill in full, you begin to carry a balance that is charged interest. You can still charge your card up to the limit over the next billing cycle, even if you paid less than the full amount due. 

That’s how people get into credit card debt. They develop a habit of spending more each month than they can afford to pay back, and they’re charged a high interest rate on the balance they still owe.

The way to stay out of credit card debt is to avoid charging more than you know you can pay back each month and making sure you pay your bill on time and in full. But sometimes that’s not possible. How can you stay in good standing with your credit card company if you can’t afford your bill?

Making minimum payments

Credit cards allow you to make a minimum payment that’s clearly indicated on your bill. It’s the greater of a flat fee or, for larger balances, a small percentage of the balance (around 1 to 2 percent). 

You must pay at least the minimum to avoid late fees, an interest rate increase, and damage to your credit score. If you do nothing else to pay down your credit card balance, at least make minimum payments to remain in good standing.

You have from the end of the billing cycle until the due date to pay. This 21-day time frame is called the grace period.

What happens when you only pay the minimum?

While paying the minimum will help you avoid negative consequences, stopping there will lock you into a cycle of credit card debt. Here’s an example of how that happens.

Suppose that over the course of a month, you charge $500 to your brand-new credit card, which has a $1,000 limit and charges a 16 percent Annual Percentage Rate (APR). Your credit card issuer charges the greater of $25 or 1% of your balance, so in your case they charge $25. The first bill arrives and, unfortunately, you’re short on cash and can only afford the minimum payment right now. 

You now owe $475 and can charge up to $525 over the next billing cycle (your credit limit minus the balance you are carrying over from last month).

If you kept making $25 payments, it would take you two years to pay off the balance, and you’d spend $85 in interest payments on top of the original $500 owed. 

In that example, you used your credit card for one month and then stopped, but odds are you’ll still use your credit card in the future. Let’s say that in your second month with this credit card, you charged $300. Your next bill will add that to the $475 plus interest you still owe. 

If you keep using your credit card and only pay the minimum amount, your balance and interest charges are going to grow exponentially. As time passes, it’ll only become more difficult to get out of credit card debt.

Because your credit score is partially determined based on the amounts you owe, getting into credit card debt can lower your score. Over time, this could make it more difficult to take out a loan, rent a home, get access to utilities without having to make a deposit, or even get a job. 

The power of paying more

If you’re facing a credit card bill you can’t pay off in full, consider at least paying more than the minimum payment.

Let’s go back to that $500 credit card bill at 16 percent APR. Paying the $25 minimum while never using the card again means two years of debt and $85 in interest payments. 

But what if you could pay $50 a month instead? You’d be debt-free 13 months faster and pay $45 less in interest. 

How to get out of credit card debt faster

If you’re in credit card debt, the first thing to do is stop using your credit card. Don’t make it easy to spend more money than you have. 

This is a good time to carefully budget and use only cash to pay for your monthly expenses. Negotiate with your internet service provider and cell phone company to see if they can offer you lower monthly rates. 

Put any money you free up by cutting expenses toward your debt. If you get a tax refund or a bonus from work, use that money to get out of debt faster, too.  

What if you can’t afford your credit card payments?

If you can’t even afford the minimum payment, ignoring your credit cards bills will not make your problem disappear. On the contrary, you’ll incur late fees, reduce your credit score, and increase your interest rate — and that’s before you get calls from debt collectors. 

Call your credit card company and explain your situation. If you show them that you’re serious about paying them back, they may be able to help you by allowing you to make lower payments. 

Need more help with your credit card debt?

There are resources available if you need help getting and staying out of credit card debt. Take care to avoid debt relief and credit repair scams. Don’t work with any company that:

• Charges you a large up-front fee
• Charges you to get your interest rate reduced
• Claims it can remove accurate negative information from your credit report
• Wants you to dispute accurate information on your credit report
• Doesn’t explain the rights you have to contact credit reporting agencies for free 
• Tells you not to contact credit reporting agencies

The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.

Article written by EVERFI