Why More than the Minimum Makes Maximum Sense With Credit
Wednesday, November 19th, 2008
We all know that you will likely never get out of debt paying only the minimum payment on your credit cards but that is only part of the financial story. In actuality, there are many reasons being a responsible credit card user is important to your financial well-being.
First, you’ll save money. There will be no finance fees accruing on your account. The money you spend over the years paying finance charges probably can afford you a dream home in the Bahamas once you add them all up. Stop wasting your own hard-earned money supporting the credit card companies.
Secondly, paying off your debt should always be your top financial priority. Living with debt is not the easiest way to live. One little error can cost you thousands so it is much better to live in the clear and work on paying off your debt as fast as you can. As your budget allows, extra funds each month should be allocated to your credit card bills as much as possible until paid in full.
The third most important reason is your future. While many people can’t plan for tomorrow let alone for years down the road, it is essential to pay off credit card balances for your future. If you are not currently a homeowner, you will likely need a mortgage at some point. Nowadays, even renters will undergo credit checks. Too many outstanding balances and too high of debt-to-income ratio can paralyze your hopes of ever securing financing for any reason. Lenders want to ensure there is as little risk as possible when lending money for a new car, a new home, or a general loan. If you are not paying more than the minimum or have difficulties making payments, you will likely be considered too much of a risk. Clean up your debt before venturing out for a loan.
The fourth reason you make larger monthly payments is to keep your credit score as high as possible. With the current state of the economy, a good credit score is not as easy to come by as it once was. Having credit card balances that are too high in respect to your overall credit worthiness will negatively impact your credit score, causing it to drop points. If you continue to make minimum payments on your credit card balances month after month, it will become even harder to bring your score back up. By reducing your balances as much as possible in the shortest amount of time, you will see your score regain upward momentum.
Finally, as a credit card holder, you probably rely on your card to be there in the event of an emergency, when the cash you have on hand is not enough. Continually carrying a balance on your credit card will leave you little room in the event something does happen. Imagine getting stranded on the side of the road by a malfunction with your vehicle but the mechanic returns your credit card, saying it has been decline. Or worse, you end up paying for the work but it results in excessive over the limit fees that make it all the more difficult to pay down the debt.
As a credit card holder, you are obligated to yourself and your financial future to spend wisely and use the card responsibly. Credit card companies calculate and offer you the ability to make the minimum amount of payments each month. However small that amount may seem, it can be highly misleading. The calculations will continue to double month to month, leaving you with much more of a balance than you actually made in purchases. Never make purchases, aside from emergencies, that you do not have the cash to back it up. Credit cards can be great for their rewards programs and their convenience but they are also the gateway to life-long debt. More than the minimum should always be a budgeting goal you work to achieve.
