How Paying Your Minimum Credit Card Leads You Into a Debt Spiral
If you have a credit card, in theory you should know how missing a payment or paying less than your total balance every month can lead to a spiral of debt. The interest rate on credit cards is very high compared to other financial products, and it gets worse when you don’t pay your balance in full each month.
And credit cards make it easy to fall into this debt spiral. One way to do this is for your issuer to display a “minimum balance due” every month in a prominent place on your account / online account, and if you don’t know any better and only pay the minimum all the time, you may end up end up getting a lot more money in the long run.
CNBC explains how only the minimum pays off every month, you can quickly add:
The average household with credit card debt owes approximately $ 5,700, while those under 35 owe $ 5,808. If you paid the minimum $ 5,000 debt at the current average interest rate [which is over 17 percent], you will be in debt for over 18 years and will pay approximately $ 11,400 in interest.
As Lifehacker previously wrote , the minimum payment of some issuers is only one percent of your total balance. And while they say it gives you, the consumer, a lot of flexibility, it’s actually just a way to profit from you. (However, if you’re in a period of financial stress , the minimum balance does allow you to maintain your credit rating / keep creditors off your back until you get back on your feet.)
This is why it is so important to view the credit card as a tool and use it as a means to an end. It is easy to spend more than you can afford, but you should charge as much as you can pay in one month. Credit card companies are counting on you not to.