Don’t skip your minimum credit card payment

Have you received a bill from your credit card company that lets you skip your minimum payment for that month as a gift for being such a good customer? This is the most common during the holiday season or right after.  Don’t fall for this.  You will still have to pay the interest charges on the unpaid balance. This information is usually in the “fine print”.

It may sound great right after you have made all those holiday purchases and have to start paying for them.  Keep in mind, you should not make the minimum payment anyway and this really isn’t a gift to you, but more money for the card issuer. The only benefit is you won’t have to pay the late fees on the amount.  Depending upon the amount you owe, the interest you pay can be high.

Paying the minimum is costly

Paying only the minimum is not a good practice.  This can cost you additional money and the balance you owe can add up quickly, since the interest continues to grow on it.  According to a survey conducted by Consumer Reports, shoppers planned to spend $756 on holiday gifts in 2011.

For example, if you spent $700 on 2011 holiday gifts, charged it all on your credit cards at an interest rate of 13 percent, it would take you four years to pay it off.  This is based on paying the minimum monthly balance of $20 and would cost you $185 in interest over four years, which is 26 percent of the amount you spent! This is assuming that you had no other balances on the account and didn’t charge anything more on the account.  If you paid it off in two years and paid $34 per month, you would cut the interest in about half and pay $99.  If you paid it off in one year at $63 per month, interest would be $51.

Here is the summary of $700 at 13 percent interest, paying it off in one to four years:

Paying off in 4 years   Minimum $20 per month       Pay $185 in interest

Paying off in 3 years   Minimum $24 per month       Pay $150 in interest

Paying off in 2 years   Minimum $34 per month       Pay $99 in interest

Paying off in 4 years   Minimum $63 per month       Pay $51 in interest

Don’t get in the habit of only paying the minimum, it takes a long time to recover and it is costly. In fact, according to Consumer Report, six percent of consumers are still paying for holiday expenses from 2010!

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Auto Loans, Credit Cards, Credit Report, Credit Score, Debt, Financial, Money & Identity

This post was written by John Ulzheimer