Credit Card Minimum Payments Explained

Paying the minimum on your credit cards might feel like it's okay to do because all of the credit card companies out there allow you to do it. But you've got to understand that if you are making minimum payments on your credit cards it is a total ripoff because you're paying mostly interest and just a tiny bit of principal and paying down that credit card every single month and that is not a good thing if you want to be getting ahead in life with your finances. So in this video I'll cover how the minimum payments work on your credit cards so that in the future you can avoid making those minimum payments because once you find out how much of a ripoff they are you're probably not going to want to be doing that ever again. Now I do want to preface that if you are in a pickle and the only payment that you can make on your credit card happens to be the minimum payment then go ahead and do that because the last thing you want to do is not make a minimum payment because that's going to hurt your credit score, you're going to accrue late fees, and you can even have a higher APR as a penalty APR on your credit card by making late payments. So definitely make sure that you always pay at least the minimum but we don't want to pay the minimum we want to pay more than the minimum if you can. So when it comes down to how your minimum payments are calculated on your credit cards it's actually fairly complicated because every single credit card issuer out there is going to have different guidelines but in general you're usually going to find that you're going to be paying a minimum of one to three percent of your total balance and this includes all of the interest and the fees. So one to three percent of the total balance that's generally going to be your minimum payment that's due. So if you owe five thousand dollars on your statement then you could generally expect to pay about fifty to a hundred and fifty dollars as a minimum payment and that is going to include the interest and any fees that maybe you accumulated and also just a tiny bit of principal as paying down that credit card goes. But you really need to understand the basics of your credit card interest rate because if you have an interest rate of seventeen percent on your credit card and you divide seventeen percent by twelve meaning twelve months in a year then you're going to be paying one point four percent per month in interest and so if you're only paying two percent as far as a minimum payment goes then one point four percent is going towards interest and then only point six is going towards paying down that credit card. So you can see how that's a big problem and you're not going to get anywhere unless you pay more than that minimum payment that's due. And you also need to be aware that the minimum payment can also fluctuate every single month because as you pay down the credit card that can also change the minimum payment and if you still continue to use the credit card that's also going to be changing your minimum payment because as your balance goes up then your minimum payment is also going to go up as well. So I would highly recommend that if you are carrying a balance on your credit card that you take that credit card and put it aside and stop using it until you get that balance paid down to zero so that you can stop accruing interest. Because if you keep using that credit card and you're the type of person who pays a minimum payment then your minimum payment is just going to keep going up and your credit card balance is going to go up but you're not getting it even close to paying it off. So definitely put it aside stop using it until you get that credit card under control. Here are two real examples of balances that were due on the same credit card. The one on the left shows a $4,900 balance with a minimum payment of $49 which is about one percent. But the example on the right has a balance of $7,700 and the minimum payment here is $203 which happens to be about 2.6 percent. So keep in mind that the minimum balance can change every single month based on the current interest rate and your current balance. So even if you're using the exact same credit card these numbers can totally fluctuate and you really don't have any control over this because like I said all credit cards have different guidelines as to how they're charging you that minimum payment. Now I do want you to be aware that credit cards are required by law to show you this simple chart on every single statement that you receive. So if you receive your statements online or in the mail you can always see this chart and it's always going to give you some basic information. It's going to warn you of making a late payment and how long it's going to take you to pay off your credit card if you're only making the minimum payment or if you pay a little bit extra. The chart that you're looking at is based off of a credit card with a $7,700 balance so you can clearly see by making higher payments of only 273 bucks rather than the minimum then it's going to take three years to pay off the balance instead of a whopping 22 years and you're going to end up saving a ton of money in interest as well because obviously if you're paying it over 22 years that's going to take a heck of a lot longer than just three years. So now that you understand the basics of making minimum payments on your credit card the next time you have to make a payment make it more than the minimum payment so you can get that paid off sooner rather than later. Now if you are the type of person who doesn't ever want to pay any interest on your credit card all you have to do is just make sure you pay off your statement balance in full every single month by the due date. So if your statement balance is a thousand bucks and it's due on the 27th then pay off that thousand dollars by the 27th and if you continue that every single month you will not be accruing any interest and this is always the best way that you can go about using your credit cards because it's interest-free. Now if you are interested in more detail about how credit card interest works I'm going to leave another video over here specifically on that topic so that you can get more into the nuts and bolts of how your credit card works because I understand that this video just did a general concept of the interest. So check out that video if you're interested. Subscribe to this channel if you have an interest. But thanks for watching. Have a great day.