The cost of paying the minimum

November 30, 2006

If you have credit card debt, it can be hard to pay more than the minimum each month. However, if you stick to paying the minimum you will end up paying your credit card debts for many more years than you need to. If you are having problems with your repayments, then here are some tips about the real cost of paying the minimum on your credit card bills each month.

What is the minimum payment?

With most credit cards, you have to pay a minimum each month back on your outstanding balance. This amount is usually 3% of the balance or £5, depending on which is greater, although this can vary from lender to lender. If you don’t pay the minimum back each month you will get charged late fees, have your interest increased or even end up defaulting on your payments.

Is paying the minimum OK?

In general, you should always try and settle your entire balance each month. However, this is not always possible and instead you should try and pay as much as you can towards the bill. The only time that paying the minimum will not be too bad is if the minimum is at the £5 mark, in which case the interest on the balance will not be too large.

Compound interest

One reason why simply paying the minimum costs so much is the problem of compound interest. This means that the interest is added onto the bill each month, and so paying the minimum will barely cover the interest you accrue. For example, if you only paid the minimum on £1000 each month on a 20% interest card, it could take you over a decade to pay back the amount and will cost you more than twice the amount you originally spent.

Losing your grace period

If you only pay the minimum and not the full balance, then you lose your grace period, meaning that interest will immediately accrue on any new purchases. Your balance will be reduced so slowly that you will be paying off your debts for years to come, so it really does pay to clear your balance as much as you can each month.

Getting out of paying the minimum

It can be hard to get out of the habit of paying the minimum, because using money for anything else other than debt will seem appealing each month. However, you should remember that by not paying more you are costing yourself a lot of money that you could use for other things. You should create a budget and work out the maximum you can afford to pay each month. If you have any spare cash left over, rather than buying luxuries you should put it towards your debt. If you do this then you will pay your balance off much more quickly and not incur the heavy costs of paying the minimum.