Personal Finance Advice

If you are like most other modern-day consumers you have at least one credit card, and chances are that you allow your credit card accounts to carry a balance from month to month instead of paying them off with every statement.  How do you decide how much money to put toward your credit card debt each month? Unless it’s your plan to stay in debt for a really long time and pay a good amount of money to your credit cards in interest payments over the span of several years, you shouldn’t be making only the minimum payment required by the credit card company.

Why is it important to pay more than the minimum payment? Think about what a minimum payment it; it’s an amount set by your credit card company that is just enough to keep you paying every month while also allowing the interest charges to pile up.  Interest charges are a huge way of making profit for these companies, so people who only make minimum payment are ideal customers.

If you make the minimum payment on your credit card bill each and every month then you probably aren’t even paying the monthly interest charges in full.  In fact, by only making the minimum payment you’re going to wind up owing so much more over the span of time you have the balance because you’re paying interest on the interest.  It’s called compound interest and it works like this:

1.  You don’t pay your balance off in full so interest is charged on your remaining balance.

2.  When the next statement comes you make the minimum payment again, so the interest that was charged last month still sits in your account, joining the rest of your balance.

3.  As the months go by, you consistently only make the minimum payment and the interest charges consistently become part of your balance.  In other words, you pay interest charges on your interest charges.

4.  Before you know it, your balance has grown exponentially even though you haven’t made very many purchases at all. 

There are times when it is okay to make only the minimum balance on a credit card.  If you are making an aggressive attempt to pay off all your debt, debt laddering and the debt snowball program both call for some accounts to only receive minimum payments while one account receives all the extra money.  If you occasionally make minimum payments in order to get your hands on some extra money - for vacation, for holiday spending, etc - it’s not too financially devastating, but only if you do this once in a while instead of several times a year.

Make minimum payments if you have to, but know that it’s not something you should do as a habit.  Your personal finances will never get under control if you consistently send in the minimum payment on your credit cards and nothing else…although your credit card company will be very grateful for the extra income.