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3 Misconceptions About Credit Card Minimum Payments

Most people consider paying bills a less-than-fun pastime — to put it politely. Making
purchases on credit is convenient in the moment, but the statements always arrive in the mail  like clockwork. And, for the sake of your credit history, it’s very important to stay on top of these payments.

On your statements, you’ll notice there is a new balance and a minimum payment due, along with a date by which to pay. Depending on your financial situation, you may be tempted to pay the minimum amount due instead of wiping out a larger portion, or all, of this month’s balance. While this keeps your account from accumulating a late fee or slipping into delinquency, it’s not a sustainable habit.

Understanding credit card minimum payments can help you decide the best amount to pay.

Here are three common misconceptions to get you started.

Myth #1: All credit card minimums are the same.
Credit card minimums are not universal. You’ll need to check your cardholder agreement to
discover exactly how your issuer calculates yours. If you have multiple cards across a handful of credit card companies, you will likely notice a difference in the minimum calculations.

Some card issuers charge a small percentage of the account balance, typically between one to three percent. Other companies charge a percentage of the current balance, plus accrued interest and late fees. Sometimes you’ll owe a low flat fee, like $15 or $25. Again, the best way to determine how much you’ll owe on your balance is to look at the fine print in the terms of the card in question.

Myth #2: Paying the minimum stops interest from accruing.
While paying the minimum does press pause on late fees and account delinquency, it does not stop interest from building up in the background. In fact, as NerdWallet points out, sometimes making the minimum payment will “barely wipe out last month’s interest.”

In this way, continuously compounding interest can turn your balance into a treadmill — you’re “running” constantly but never getting ahead, financially speaking.

Myth #3: Paying the minimum is an effective way to eliminate debt.
Perhaps the most dangerous misconception, thinking paying the minimum can put a real dent in your debt is a mistake. While it’s definitely better than paying nothing, it tends to
significantly draw out the amount of time and money it takes to satisfy a debt.

Say you’re facing down a $1,500 credit card balance with an annual percentage rate (APR) of 18percent. Your minimum payment is $30, or two percent of the total balance. It’ll take 231months — nearly 20 years — to pay off the balance completely, making only the minimum payment due, according to a Bankrate calculator. Even more horrifying is the fact you’ll end up paying nearly $4,400 when all is said and done, thanks to the interest you allowed to flourish during that time span.

Now let’s compare this tactic to other debt repayment strategies. Debt consolidation loans
typically operate on fixed payments for 24 to 60 months. A debt relief program can address
debt in 24 to 48 months, although the exact timeline depends on the amount of debt enrolled and the settlement agreements reached. Debt management programs generally last three to five years. Even do-it-yourself debt repayment tends to go much faster than paying the minimum because you’re throwing your money at your debts systematically to chip away at it.

It’s nice to have the option to pay the credit card minimum when money is tight, but it’s best not to do so. As you can see from myth busting these misconceptions, it’s an expensive and long-lasting way to tackle debt.

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