Why Minimum Payments Aren’t Enough
It seems like a reasonable thing to do—pay the minimum payments on your credit card to keep your credit record clean. You’ll pay them down eventually, after all, and in the meantime you still have room on the card for necessary or emergency purchases.
In fact, this is not a good idea at all. It’s actually an efficient way to put yourself into a massive spiral of debt. The problem with paying the minimum payments is that it leaves a large chunk of money on the card, collecting interest that you then have to pay. If your minimum payment is less than the amount being charged for interest, then your bill will consistently go up instead of down. Even if the minimum payment is more than the interest amount, it’ll take a very long time to pay down your bills if that’s all you pay each month. This unsecured debt remains on your credit record, increasing your debt to income ratio, which can have a negative effect on your credit rating.
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Sooner or later, you’ll have a large emergency expenditure—a medical bill or a car repair—and this amount will pile on top of your already large balance, possibly eliminating the breathing room you’ve left in your credit limit. Because you’ve been sitting on top of a large credit balance all this time, it will be harder to increase your spending limits. At this point, you’ve maneuvered yourself into a corner you might not be able to easily get back out of.
In addition, because credit card interest rates are so high, over the period of time it takes to pay off your card, you’ll pay hundreds or even thousands of dollars more than your original expenditure. As an example, consider a $3,000 balance on a card with an interest rate of 17%. With a minimum monthly payment of $25, it will take you 126 months to pay off your debt. That’s over ten years. In that period, you’ll pay over $2,200 in interest. And that’s if you don’t charge anything else on the card.
Keeping Your Credit Card Under Control
Ideally, the best way to deal with a credit card is to limit your spending so you can pay off the entire balance every month. This way you don’t have to worry about interest rates or finance charges because you don’t carry a balance on the card. Also, monitor your spending and keep your balance at under 50% of your limit. This will keep you safe from overage charges, even if you have an unexpected, large ticket expense.
If you can’t pay off the entire balance every month, at least be sure you’re paying enough to make a dent in the balance, rather than paying little more than the interest every month. And if you’re really serious about paying off your balance, you’ll put everything you can afford toward your credit cards until you’ve paid it off completely.
Always Check Your Interest Rates
Before you apply for a credit card, be sure to check the interest rates you’ll be dealing with. These are all outlined in detail on the agreement. The average interest rate as of February, 2009 is 17.7%. Walk away from anything higher than that if you don’t plan to pay your balances off every month. Also read the agreement closely to look for yearly fees or other hidden costs. Credit card companies have become notorious for raising rates periodically, too, especially if you miss a payment, so watch your statements closely.
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Keep Your Cards to Yourself
One last way to keep your credit card spending under control is to be sure you’re the only one using it. Of course you want to keep an eye out for possible identity theft, but a much easier way to run up your bills and damage your credit is to let your family use it.
If your card is issued jointly, and your spouse runs up bills you can’t pay, this will damage your credit rating as well as your partner’s. If you allow your older children access to the card, you’ll want to keep an extremely close eye on it, as well.
It’s a very good idea, to have a card that’s entirely in your name, without your spouse as a joint user. This way, you can build your own individual credit, so that if anything should happen, your credit rating isn’t dependent on your spouse’s. Your personal credit rating is too important for you to allow it to be out of your own control.