If you love the minimum payments option on your credit cards then it’s probably because you can afford the minimum payment or you don’t know its real use. Minimum Payments are lethal to your financial health. If you have a credit balance of $2,000 at an annual rate of 18% and you decide on minimum payment which is just a percentage amount of the total $2,000 debt and in this case 2% or $10, whichever is lower, then it would take you almost 30 years to pay off the $2,000 debt.
According to Chief financial analyst at Bankrate.com, Greg McBride, making minimum payments on your credit card is like running on a treadmill – you are running in one spot, not really going anywhere.
CreditCards.com a credit card comparison site has calculated that, during that very long and very slow time it takes you to pay 2% of the $2,000 debt balance, you would end up paying an additional $4,931 in charges and interest, more than 146% of the original $2,000 balance on the card. That’s quite expensive!
Most people cannot make these calculations themselves so they do not really know what they are getting themselves into when they decide on minimum payment because it seems convenient. According to a survey by a U.K based personal finance website TotallyMoney.com, only 2% of people were able to answer correctly, when they were asked to calculate how long it would take to pay off a credit card with minimum payments . 4% were able to correctly calculate the amount of interest they would also have to pay and then it was discovered that most people do not know or underestimate the amount of interest they would have to pay off. The most clueless even thought they would be avoiding paying interest by making minimum payments monthly.
Paying minimum balance on credit card has a much broader impact as about 30 percentages of FICO credit score depends on how much you owe on your accounts. It does not necessarily mean you’re a high-risk borrower with a low FICO Score when you owe money on your credit accounts. However, making use of a high percentage of your available credit would suggest that you are over-extended and would be likely to make late payments or even miss payments all together.
In most cases, never missing a payment and showing a small balance would indicate that you can manage cards. It is better to carry a small balance than no balance. It is very important to manage your credit cards carefully. According to FICO, Paying off huge credit cards debts with outstanding balances on other credit cards can also damage your credit score and indicate a very high over extension risk. If you are close to maxing out most of your credit cards then according to FICO you have a high credit utilization ratio and could find it difficult to make future payments.
And for some people who believe that not owning a credit card is the best, experts say that not having a credit card at all is absolutely not advisable because when building a financial history or embarking on a career, credit cards are an essential financial tool.