Credit cards can be a useful tool in managing purchases and combining expenses, as well as making large purchases more affordable in the short term. However, many risks are involved with credit card usage, one of which is paying the credit card minimum payments when they are due.
Credit card minimum payments are calculated as the interest and fees due on the card + 1% of the principle balance owed. Credit card companies may impose a higher minimum monthly payment, but the about lowest they will go is interest and fees due + 1% of principle. Also, if there is a low balance on the card, the company may set the minimum monthly payment at $10-$15.
As an example, if a credit card has a principle balance of $3000 with a 15% interest rate, the first of the credit card minimum payments will be $67.50. $30 would go toward principle and $37.50 would go toward interest, with both figures decreasing only about 20-30 cents per month. Under that payment plan, it would take over seventeen years to pay off the credit card with total payments adding up to $6229 – and that is if every payment were made on time and there were no further changes to the card agreement and no further charges placed on the card.
If the credit card minimum payments were increased to $90/month, or 3% of the principle balance owed, it would take 12 years to pay off the card with a total of $4,936 principle + interest.
However, if the card continues to be used, the cost rises and payments extend further into the future, to the point where it would be practically impossible to pay the card off just using minimum monthly payments.
If there is a late payment on the card, some of those charges may rise substantially. Late fees, higher finance charges, and other fees will be added on to the credit card charges, increasing the bill and extending the time to pay it off if only the credit card minimum payments are paid. Late fees can be up to $25 for the first infraction, and default interest rates can get well over 25%. Also, paying late on a card will reduce a credit score, making credit harder to obtain and more costly down the road.
The average US household has about $15,000 in credit card debt…an amount that would take over thirty years to pay off making minimum payments, with over $18,000 paid in interest.
Due to relatively high interest rates, making the monthly minimum payments on a credit card has some extreme long-term costs which drastically increases the amount paid toward regular purchases, and may result in never having a debt fully resolved. Paying credit cards off quickly and only using them for specific purchases keeps debt loads low and frees up money in the future.