It’s the oldest trick in the book. Credit card companies and banks offer you great deals on loans that have extremely affordable monthly payments. However, you should really be looking at the interest and the number of payments you’ll have to make. More often than not, you’ll find paying the minimum can add an additional 30% from interest alone when everything is said and done. Even phone providers are starting to take advantage of minimum monthly payments for the latest and greatest hardware. Just 35 bucks extra for the new iPhone, that sounds great. Well, over the course of two years you’re actually spending a couple hundred dollars more and are locked into a contract until you pay it off.
You’ll see this most often with credit card debt, though. They give you an extremely affordable figure, for whatever amount of debt you have accrued, on a monthly basis. It works on basic human instinct. Would you rather pay your entire balance of $3,546 now or $50 a month? The obvious answer is the latter. The trouble is that you end up paying more in interest over time.
Maybe you find the convenience of paying more worth it. This is the opinion of many people today. The mentality that if you can’t afford something now, that extra $200 dollars in a year or two is a small price to pay, unfortunately, paying the minimum can also hurt your credit score. Lenders access and review your payment habits and will often consider this when looking into giving you a loan. If they find something unsuitable for their business, you may not receive that loan for your new car or house.
You want to remain in good standing with lenders to make those major life purchases on your terms and not those of the bank. When paying the minimum on your credit cards or anything else, you put yourself in a position where you can hurt your credit, end up owing more, and you may even struggle to make the minimum on multiple balances.
Waiting and saving until you can afford the total is always the best course of action when it comes to making purchases. You can avoid the cycle of debt simply by managing your credit payments this way. A good rule of thumb to follow, if you’re already in debt, is to pay at least twice the minimum amount.
Paying the minimum seems convenient at the time but remember it benefits your lender more than anything else.