What Happens If You Only Make the Minimum Credit Card Payment?

Making only the minimum Credit Card payment can lead to a lot of debt that can be difficult to pay off. This is because the minimum payment is usually only a small fraction of the total balance. This means you only pay the interest on your Credit Card debt, not the principal. As a result, your debt will continue to grow even if you are making payments.

This guide will explore the consequences of making only minimum Credit Card payments and offer alternatives to help you manage this situation during strenuous times.

Consequences of making only the minimum payment

1. High interest costs

When you pay only the minimum amount due on your Credit Card, a large portion of your payment goes towards paying interest and not the principal amount.

As a result, you end up paying significantly more in interest over time. The longer you carry the Credit Card debt, the more interest accumulates, leading to a debt cycle that can be difficult to escape.

For instance, if you have a Credit Card balance of ₹ 10,000 with an 18% annual interest rate and you only make the minimum payment, you end up paying ₹ 150 in interest alone in the first month.

This means that the actual amount you are paying towards the principal is only ₹ 50. Over time, with high interest rates, it may feel like there has been no progress on paying off the Credit Card debt.

2. Prolonged debt repayment

Making only minimum payments extends the time it takes to pay off your balance. For instance, if you have a high interest rate and consistently pay just the minimum, it could take years to settle your Credit Card debt. This means you remain in debt much longer, limiting your financial freedom.

3. No interest-free period

If you do not pay your full Credit Card balance each month, new purchases will not qualify for an interest-free period. Instead, these purchases will start building up interest immediately, further increasing your Credit Card debt.

4. Negative impact on credit score

Paying only the minimum keeps your credit utilisation ratio high, which can lower your credit score. High utilisation is an indication to lenders that you might be a risky borrower. A lower credit score could impact your ability to secure loans or get favourable interest rates in the future.

5. Potential for a debt spiral

When you only make minimum payments, your Credit Card debt can quickly grow due to interest and fees. This creates a debt spiral, where you struggle to reduce your balance, making it harder to achieve financial stability.

Alternatives to making only the minimum payment

• Pay as much as you can afford. The more you pay, the faster you will reduce your balance and interest charges. Minimise new charges to prevent your balance from growing.
• Consider a balance transfer to a card with a 0% introductory APR to avoid interest. However, be mindful of balance transfer fees.
• Contact your Credit Card issuer and ask for assistance with financial hardship. They may comply and offer lowered interest rates or payment extensions.
• Seek credit counselling. Nonprofit organisations can help you develop a debt management plan, negotiate with creditors and improve your financial habits.

Summing it up

Making only the minimum credit payment may provide short-term relief but can lead to long-term financial challenges.

Explore alternatives such as paying more than the minimum, using balance transfer offers or seeking credit counselling to prevent Credit Card debt from spiralling. Taking proactive steps to manage your Credit Card debt can help you maintain financial stability and avoid the pitfalls of high-interest charges and prolonged repayment periods.

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