What Is a Minimum Payment and How Does It Work?

If you have mounting credit debts, you have likely become familiar with the minimum payment. But what does making the minimum payment really mean, and what happens when you are unable to make it on time? Let’s look at how minimum payments affect your bottom line.

What Are Minimum Payments?

The minimum payment is the lowest amount you must pay on an outstanding credit debt each month. This is the least amount of money the creditor is willing to accept, and as the debt grows larger, so will the monthly minimum. Different cards will have different minimums, but in most cases, they are set extremely low.

This is not designed to work in your favor.

Current Balance and Statement Balance

There will be two amounts on your credit card: the current balance and the statement balance. This may be the same number, or it could be different depending on card usage through the month. Your statement balance will remain the same until the due date, as this is the full amount you owe the creditor. If you can pay the full balance by the due date you will avoid accruing interest charges.

Your current balance will increase as you make charges until the current billing cycle ends. If you haven’t made last month’s payment, your current balance will reflect the past charges as well as the new debts.

What If You Only Pay the Minimum?

So what happens when you make the minimum payment? While this may seem cost effective in the moment as it might allow you to keep more money in your pocket each month, the truth is it’s the worst thing you can do short of outright missing payments altogether.

When you make the minimum payment, the payment will go toward interest and finance fees first. By only making monthly minimums it is possible you will never be paying toward the actual item you bought. Many people end up paying for items long after the novelty wears off and the item itself is broken or discarded.

The credit card company doesn’t care about anything but your ever-increasing balance. The longer the loan, the more interest accrued.

What About Missed Payments?

If you miss making the minimum payment on your credit card balance, negative impacts will begin right away. In addition to charging a late fee, your interest rate could change, and the missed payment can be added to your credit report. And if your interest rate does change, it will be to the highest rate allowed on the card, called the penalty rate. This can quickly snowball into unsustainable debt that affects you for years to come.

Paying less than the minimum payment will be considered the same as missing the payment altogether.

At CreditGUARD, we believe in creating a smart budget can afford the ability to pay more than the monthly minimum, thereby decreasing the overall debt each month. With some strict budgeting and smart decision making, you can begin pulling yourself out of debt today. Give us a call and see which of our debt management programs may work for you.

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