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The problem with this option is that it does nothing to improve your debt situation. If you are making minimum credit card payments, then a major portion of what you pay each month is going towards interest for the loan.
Here’s an example: If Tom owes $15,000 in total unsecured debt, and he is making $300 payments each month, it will take Tom 9 years (108 months) to pay off that debt and he will end up paying over $17,400 in just interest, at 20% per annum. That’s $32,400 total for just $15,000 debt. The example assumes that the minimum payments on credit cards is made on time, every month. If Tom misses a month, or can’t pay the minimum, or needs MORE credit then he is going to be paying off the debt for even longer.
Most credit cards charge a fee for exceeding your credit limit, which is easy to do when you’re paying so little of your bill every month, so be sure to avoid this mistake by making full-sized payments on your card. Maybe you would like to get out of debt doing it yourself. So other than the fact that you’ll be paying A LOT of money in interest, what are the other repercussions of making minimum payments only?
Paying minimum credit card payments and most unsecured loans, in reality, is underpayment. When you’re making the minimum payments you’re still building up debt, and over just a few months you may see your credit score start to plummet. Why will my credit score start to fall? A big part (30%) of your credit score is determined by how much debt you carry, especially revolving credit, like credit cards. So that means that when you amass charges on your card and fail to pay them off in full, it affects your credit score, and in time, the damage could become significant.
Many credit card companies ask for clients to at least be making the minimum credit card payments at 4% to 6% of the balance each month. If you only make this minimum payment and continue to use your card, the balance is going to inflate considerably. Before you know it, that small 4% to 6% payment is going to be a larger amount due to the higher balance you’ve accumulated.
So now your low monthly payment is not so low anymore, and your credit score is getting dinged. Consequently, other monthly payments such as loans, insurance payments, rent and/or mortgage payments could start to increase as well.
Credit cards can be your best friend when building credit, but as you face a financial crisis, do not give into the temptation of making minimum credit card payments and continuing to rack up charges. As we have gone over in this article, there are serious and expensive repercussions to not paying the complete bill each month. If you feel like you need more information, get your free consultation from one of our qualified debt counselors.
Making minimum credit card payments is like running on a financial treadmill. We’ve all been there; times get tough, we decide to use our credit cards to pay bills, buy things, maintain our lifestyle, etc, while making the minimum monthly payments. We say to ourselves, “It’s alright, this month I’ll pay them minimum, but next month when I have more money, I’ll make a large payment.”
Things do not always go as planned and paying minimum payments on credit card debts means that a lot of money goes out of my pocket, but the balance does not budge. For example, if you have a $5,000 balance on your credit card and the interest rate is 18.9% and the minimum payment is $200 per month, it will take you 11 years and five months to pay the whole thing off. By the time you make that last $200 payment the total amount you will pay is $8,109!
As an example, let’s say you bought a bedroom set. When you bought the bedroom set, you paid $5,000 with your credit card, and by the time you pay it off, it will be as if you paid $8,109 for it. That’s 62% more! In the meanwhile, eleven years have gone by and you probably have long sold, broken, or thrown away that bedroom set.
Why do credit cards work out to be so detrimental to clients undergoing financial woe? That’s because credit card companies use many tricks to keep customers paying more and more. If you’re feeling doubt about debt settlement or you just have questions feel free to get a free debt consultation from one of highly trained counselors today.