Minimum Payments are Not Your Friend

Many people love the fact that they can just make minimum payments on their credit card balances. The thinking behind this infatuation with minimum payments is that they can purchase something that’s worth $1000 and only pay $20 per month to own it. Unfortunately, this thinking is faulty. Minimum payments are designed to make money for credit card companies because they inflate the total amount owed on any one item. They can also make it easier for consumers to run up additional debt which creates financial problems that could have been avoided. Although they seem nice, minimum payments are not your friend.

Think about it; would a credit card company create minimum payments if it didn’t benefit from them? These companies exist for the sole purpose of making a profit. The minimum payments make them this profit because it leaves a high balance on the credit card for an extended period of time. The interest rate is applied to that balance each month so that the consumer ends up paying a big amount to the credit card company just for the right to keep that balance on the card. This means that the item that cost $1000 initially can cost several hundred dollars more than that by the time that it’s paid off.

Some people don’t mind that they’re paying more overall if they can pay less right now for their possessions. However, the minimum payment plan also creates additional problems for the consumer. Because the individual is only paying the minimum balance, the rest of their paycheck is available for use on other things. This can cause them to do excessive spending with money that should be going towards paying off the credit card. This can create a cycle of financial difficulty that ultimately causes the consumer to go into excessive debt.

Furthermore, consumers who get caught in this cycle can be caught by surprise when minimum payments unexpectedly go up. This can happen as a result of a missed payment or it can happen just from changes in the economy. When it occurs, people who rely on low minimum payments to get by each month will find that they’re out of money and have nowhere to turn to be able to meet those payments. While it may seem at first glance that paying only the minimum due on credit cards is a great opportunity to purchase things you can’t afford, a closer look reveals that the problems this causes aren’t worth the benefits.