Credit cards offer convenience, flexibility, and some even offer rewards like cash back. They make it possible to afford large purchases when you don’t necessarily have the cash on hand. However, with great power comes great responsibility. If you develop a habit of overspending each month and can’t pay it back, you’ll be charged a high-interest rate on your balance each month until it’s paid in full.
However, we understand that sometimes money gets tight and you might not be able to cover the full balance. So below we listed the differences between paying the minimum, paying more than the minimum, and paying your balance off completely so you can understand the pros and cons of each.
Paying The Minimum
Credit cards allow you to make a minimum payment that’s a small percentage of the total balance. You must pay at least the minimum to avoid late fees, an interest rate increase, and damage to your credit score.
If You Only Pay the Minimum
While paying the minimum will help you avoid negative consequences with your credit card company, stopping there will lock you into a cycle of credit card debt each month until it’s finally paid in full. If you charge up to $500 and only pay the minimum of $25, it would take you two years to pay off your balance plus whatever interest was added on top of your original balance.
If you keep using your credit card and only pay the minimum amount, your balance and interest charges are going to grow exponentially. As time passes, it’ll only become more difficult to get out of credit card debt.
The Power of Paying More
If you’re facing a credit card bill you can’t pay off in full, consider at least paying more than the minimum payment. Let’s go back to that $500 credit card bill and only paying the $25 minimum. While never using the card again means two years of debt and extra interest payments. But what if you could pay $50 a month instead? You’d be debt-free 13 months faster and pay less in interest.
Paying In Full
Ideally, the best thing to do is pay your credit card bill in full each month if you can afford it. Over time, this will make your credit score go up and keep you out of debt. The easiest way to keep your monthly balance attainable is to not overspend and always keep track of your monthly statement so that you can afford it.