Credit cards are treacherous. You’ve probably heard this before, from your parents or in the newspaper. But when you’re standing with that tiny piece of plastic in your hands at the mall, it’s easy to forget that every swipe equals more cash out of your pocket down the line. It’s even easy to forget when you get your bill in the mail and your eyes scan the paper looking for the magic word: minimum payment.
Of course, not every lender uses minimum payments to keep borrowers in check. Some sites offer temporary loan solutions that are meant to be paid back in their entirety at the end of a given period of time. Others don’t offer minimum payment options, and instead you’re responsible for paying a set amount of money on a regular basis. There are benefits and drawbacks to each, but too often people find themselves stuck in a minimum payment cycle, doomed to pay off their cards little by little for the rest of eternity.
Maybe that’s a little dramatic. But the fact of the matter is, minimum payments are meant to keep the consumer (that’s you) paying interest to the big guys. Minimum payments rarely cover more than the interest you’ve accrued for a billing cycle, allowing your interest to keep piling up without paying off the principal. That means that with the right interest rate you can keep paying the minimum payment for years without making the slightest dent on the money that you actually spent.
If you’re in a tight spot, maybe minimum payments are the way to go for a bit. Sudden job losses or medical bills can make it hard to survive, and that’s exactly what credit cards were made for. But if you’re ever hoping to increase your credit score so you can buy that house or car you’ve been dreaming about, there’s a couple things to keep in mind so you don’t fall victim to the minimum payment cycle.
- Don’t pay more than your minimum payment on all of your credit cards – This may sound counter-intuitive, but if you’re planning on getting your credit back in order, don’t try to pay off all your cards at once. If you have more than one, choose the card with the highest interest rate to put the bulk of your money towards and pay the minimum payments on the rest. You’ll be saving the most money by doing it this way and you’ll see the results much faster.
- Try not to spend more than you can pay back. – If you only signed up for a credit card to increase your credit rating but have the means to pay for your purchases in cash, try to only use your card to the extent that you can make one payment at the end of the month and bring your balance back to zero. If you avoid getting in debt in the first place, your life will be a whole lot simpler.
- Do the math. – When you get your bill in the mail, do the math to figure out how long it would take you to pay off your credit card doing only the minimum payments. Then figure out how long it would take if you added a bit more each month. When you see the amount you’ll be saving in interest, you’ll be amazed – and much less willing to stick with your previous minimum payment method.