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Paying off Debt – What “Paying the Minimum” Really Means

Sep 23, 2016

While the concept of not spending beyond your means seems straightforward, millions of Americans are crippled by credit card debt. As of 2015, the total combined credit card debt owed by U.S. consumers was over $700 billion. It can be easy to spend beyond your means, especially when given a credit limit of several thousand dollars. It can also be easy to rack up a balance that leaves spenders with a minimum payment they can barely afford. While it can be tempting to rely on making minimum payments to get by each month, here are some facts that'll make you rethink your habits.

Paying the minimum affects your credit score

Credit cards are an essential element of a healthy credit history. The consequence of mismanaged credit card debt can carry over to affect major life purchases down the line, such as cars and homes, by hurting your credit score. Your credit utilization ratio, or the amount of debt you carry over each month, attributes to about a third of your overall credit score. A good guide to follow is to keep your balance under 30 percent of your total credit limit. For example, if your limit is $3,000, aiming for a principal balance under $1,000 will have the best chance of positively affecting your credit score.

While paying the minimum balance on your monthly bill technically maintains a positive payment history, you aren't doing much to lower your overall debt, which can have a negative impact on your utilization ratio and eventually your credit score.

Paying the minimum can make your balance skyrocket

Credit card interest rates, especially for new borrowers, can be exceedingly high. Paying the minimum usually means leaving a balance left over each month, which can eventually lead to a vicious cycle of paying just enough to keep your balance stagnant. Your credit score isn't penalized for accruing interest, but the money spent toward interest isn't doing your credit any good either. Making payments that put a dent in your overall principal balance is your best bet for knocking out debt and positively impacting your overall score.

Paying the minimum hurts your long-term savings

While making the minimum payment on a balance might help soften the immediate blow to your checking or savings account, this method will catch up to you and ultimately hurt your long-term savings. For example, say you maintain a credit card balance of $5,000 at 20 percent interest. After a year, you've paid over $1,000 in interest alone. In the end, that money is syphoned from your savings and used to only maintain your debt, not reduce your balance. In the long run, what appears to be a minimum payment turns out to be a major setback in long-term savings.

What you can do

If you are unable to pay your credit card balance in full, but want to make more than your monthly payment and are unsure of the right move, try using a debt calculator to manage your balance and create a payoff-schedule. PFCU has a variety of credit calculators, including a Credit Card Payoff Calculator, available to anyone on our website. You'll also find calculators to help manage your checking, savings, and even your mortgage.
Don't be discouraged by your credit card debt. Even if you can't pay off your entire balance each month, you should strive to take control of your finances. Start small by making more than the minimum payment each month. Your credit score (and your wallet) will thank you!


Erin Ellis
Accredited Financial Counselor
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