Benefits Of Paying More Than The Monthly Minimum

by Finance 17 November 2022

Monthly Minimum

Most credit card companies will show you how many months it will take to pay off a full balance owed when you make only the minimum monthly payment.

It can be a multi-year odyssey when you owe several thousand dollars. To understand why let’s look at the concept of APR vs interest rate.

It’s the main reason those balances take so long to come down.

APR, Interest Rates, and an Explanation of Compounding

The credit card company offers a monthly minimum payment to ensure they cover their costs for the billing period. Only a small percentage of it is applied to the principal balance owed. The rest is used to cover your annual percentage rate (APR) finance charges, a number that includes your interest rate and any fees that you owe on transactions.

Is that last part news to you? Many consumers believe that “interest rate” and “APR” are interchangeable terms. They’re not. Interest is a component in the APR calculation, but it’s only one factor. That’s why credit card companies often charge 25% to 28% APRs. Interest rates are not that high, even for individuals with poor credit.

Another characteristic of credit card interest that you should know is that the rate varies from month to month, and interest compounds on unpaid balances. Soon after making that minimum monthly payment, the credit card company will charge you interest on the remaining balance. The following month, your daily rate is calculated on the principal plus the new interest.

Explanation of Compounding

Time, Money, and Mental Health as Reasons to Pay More Each Month

Staying in debt can limit future financial endeavors and become a “bad habit” that’s tough to break. Accelerating your time frame for getting out of debt is a motivational strategy that can manifest itself in other areas of your life. When you pay more than the minimum monthly payment, you’re less likely to add to the balance with more credit card charges.

Another more obvious reason to do this is money. The credit card companies that show you a payment timeline should also show you how much you’ll pay in total if you stretch out your debt by making only minimum payments. That number could be thousands of dollars more than what you owe. Making higher monthly payments will cut that down significantly.

Finally, we come to mental health. According to a study conducted by the American Psychological Association (APA), money is a top cause of stress for 72% of US consumers. Some of that is due to job and wage situations. More of it is attributed to debt. Getting rid of credit card debt sooner by making higher monthly payments can improve your mental health.

The Bottom Line

To wrap this up, let’s examine the popular view that consumers should “carry a small balance” on their credit cards. That’s not a sound financial strategy. Any outstanding balance will accumulate interest charges and increase your APR. Pay them off as quickly as possible, and then only use them when you can pay the full balance each month.    

Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of [publisher] or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.


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