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The Real Cost of Only Making Minimum Payments on Your Debt

If you’ve got significant debt and you’re only making the minimum payments, it could end up costing you much more than what you start off owing. To that end, if you’ve got enough income to make more than the minimum payment, not only can you pay your debt off much more quickly, but your credit score will benefit greatly, as well. It’s important to know the real cost of making minimum payments on your debt, so we’ve broken it down for you below.

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The Allure of Borrowing Money

The allure of credit cards and bank loans is something we can all fall prey to, as we get to buy things we want (though may not necessarily need). Unfortunately, making minimum payments on those things can cost more than what’s on the price tag: if you don’t pay the balance off before it accrues any interest, you’re paying much more than the sticker price.

Reading Your Bill

If you read your monthly bill clearly, you’ll see where your statements show how long it will take you to pay off your bill if you make the monthly minimum payments. If you keep adding charges to the balance, the interest accrues and you could see your balance stay the same even if you make on time payments each month.

Don’t Rely on the Rewards

The Real Cost of Only Making Minimum Payments on Your Debt

A lot of folks sign up for credit cards, or make minimum purchases just to get the reward perks that credit card companies offer. It’s a good idea to avoid this unless you can pay off the balance right away. If you can’t afford to pay it off in full each month, you’ll just start accruing more interest on your balance, which can quickly outweigh any perks you received.

Keeping Your Credit Score Up 

Part of your credit score is made up of your credit utilization. This is how much money you are borrowing compared to how much credit card companies are willing to let you borrow (your credit card balances divided by credit card limits). So if you have one card with a credit limit of $10,000 and you have charges of $9,500, you have high utilization.

Related Article: How to Build Credit Fresh Out of College

This sends a message to other possible creditors that you may be less likely to pay back any loan you take out from them. Even if you are approved for a loan, you will likely have to pay higher interest rates. By making only minimum payments, your utilization stays high and your credit score will reflect that. If you pay more than minimum payments and keep your utilization low, this will keep your credit score high and serve as a positive sign to other potential creditors.

Ignoring Your Debt

The Real Cost of Only Making Minimum Payments on Your Debt

Lastly, it’s never a good idea to ignore your debt. It really will only work for a few months before you could be sent to a credit collection agency and cause serious damage your credit. On top of that, you’ll have racked up all of those late fees (a minimum of $39 dollars a month) and all of the interest that was built on your balance.

Related Article: How to Escape Debt in 2016

Photo Credit: flickr, ©iStock.com/andresr, ©iStock.com/Juanmonino

Tierna Unruh-Enos Tierna Unruh-Enos holds an MA in Journalism from Prescott College in Prescott, AZ. She is a an expert in careers, budgeting and saving money. A native of New Mexico, Tierna is a communications and marketing specialist in Albuquerque. She is also a mother, a freelance writer and lover of all things green chile (there may be a few exceptions!).
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