Carrying a balance on a credit card is one of the quickest ways to fall into debt, and getting out of debt can be very difficult if your payment habits become habitual.
More than 4 in 10 U.S. cardholders say they regularly pay the minimum amount on at least one card, according to a LendingTree survey of more than 1,500 cardholders. Among Gen Z cardholders ages 18 to 29, this percentage rises to 58%.
While paying the minimum amount avoids penalties for missing the monthly deadline, much of that payment may go toward interest rather than reducing the amount you owe, potentially stretching your repayments over many years and adding thousands of dollars to your total costs. LendingTree says paying only the bare minimum is “one of the worst habits you can make with your credit card.”
Corinna Rose, a certified financial planner with Bell Investment Advisors, says minimum payments are “not a debt repayment strategy, but a debt maintenance strategy.” “Depositing only the minimum amount will keep your account in good standing, but it will often do little to meaningfully reduce your balance.”
Here we explain why making only the minimum payment can be very costly and what you should do instead.
Why minimum payments aren’t enough
It’s easy to fall into the habit of only paying the minimum amount each month. But if you have hundreds or thousands of dollars in credit card debt, you’ll need to pay more to actually make progress toward paying it off.
According to LendingTree, the average credit card balance for a U.S. cardholder with debt is $7,756, with an average annual interest rate of 20.94%. According to Bankrate’s credit card calculator, assuming no additional fees, it could take nearly 27 years and nearly $13,000 in interest alone to pay off your debt while making minimum payments.
“A big misconception is that minimal effort means meaningful progress; in reality, you’re often just treading water while interests do the heavy lifting in the wrong direction,” says Rose.
“You also don’t have to wait for your statement to end or for your balance to start paying,” says Nathan Sebesta, CFP and owner of Access Wealth Strategies. Credit card interest is typically calculated daily, so cardholders with debt can reduce their interest costs by paying it off sooner.
“You can pay anytime,” Sebesta said. “If you’re using a credit card for the perks and convenience, it doesn’t hurt to pay off your balance several times a month and bring it down to zero as often as possible.”
Try to pay off your balance every month
Ideally, you should avoid carrying credit card balances from month to month, Sebesta says.
Ultimately, “your goal should be to use your credit card as a payment tool, not as a way to spend money you don’t already have,” he says.
Knowing your monthly balance can also make it difficult to keep track of your actual expenses, Rose says. That’s because a portion of each paycheck is already earmarked for the previous month’s purchases.
Not being able to pay your balance in full is a “warning light on your dashboard,” Rose says. “This doesn’t mean[cardholders]have failed, but it does mean it’s time to take a closer look at their spending habits and create a realistic budget, or maybe even temporarily ditch credit cards altogether.”
One of the rules Rose uses with his clients is, “Don’t use tomorrow’s income to pay for yesterday’s expenses.”
Don’t forget the minimum payment amount
Your credit card payment will be considered late if you do not pay the stated minimum amount by the due date. Credit One Bank says issuers may charge late fees, but payments generally aren’t reported to credit bureaus until they’re at least 30 days late.
After 30 days, the consequences can be more severe. A payment 30 days late can be reported to the credit bureaus, lowering your credit score and potentially making future borrowing more expensive, Sebesta says. According to Experian, for people with excellent credit, just 30 days late on a payment can drop your credit score by about 60 to 80 points.
Missed payments reported to the credit bureaus can remain on your credit report for up to seven years, but the impact on your credit score typically diminishes over time. If your account remains overdue for several months, your account may eventually be closed, causing further damage to your credit.
If you miss a payment, Sebesta recommends that you pay immediately and contact your card issuer. If it’s less than 30 days late, you may be able to avoid reporting it to the credit bureaus and potentially have late fees waived.
To avoid missing payments in the first place, Rose recommends turning on automatic payments in your credit card’s online account or app settings.
“Don’t rely on memory when technology can do the job for you,” Rose says. “Set up one automatic payment setting and you can avoid years of credit problems.”
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