The hidden side of the minimum payment of your credit card



If you are currently using a credit card, you know that it is mandatory to pay a certain amount every month. This amount is called the minimum amount, which is the lesser amount your creditors will accept for the balance of that month. This amount varies depending on your credit card provider and can be presented as a fixed amount or as a percentage of the balance. However, the fact that there is a minimum payment does not mean that you should only pay that amount.

 

Why does my credit card have a minimum payment?

Why does my credit card have a minimum payment?

Banks impose a minimum of payment on credit card holders for a number of reasons. First, it shows that lenders are responsible and reliable people who will make the payments in a timely manner. Secondly, it shows that they have the means and are able to repay the loan. Finally, the creditors want you to pay this minimum amount in order to extend the loan term and earn more money. The smaller the monthly payments, the more time it will take to free you from your debt. By extending the repayment term of the loan, banks can earn more interest. Unless your credit card debits 0%, your interest will greatly increase the balance of the balance you are hanging out. Thus, you should pay the largest amount possible, if not the total amount, each month.

 

Credit card interest rate

Credit card interest rate

An interest rate is a quantity, expressed as a percentage or fixed amount, charged by a lender to a creditor for borrowing money. When you take out a line of credit at the bank, most credit cards come with an interest rate, payable monthly. If you pay the minimum each month, the remaining balance will be carried forward to the following months. During these months, you accumulate and pay interest on the entire amount you have borrowed. If you use your credit card regularly and the balance of your account continues to grow, interest charges will also increase. This is a vicious circle that weighs you down more and more heavily. To avoid this, pay the largest portion of the balance each month, so that only a small amount, or even better, is carried over to the next month and interest is not charged.

 

Compound interest

Compound interest

This is interest paid on the principal amount of the loan, plus accrued interest from past periods. Whenever your outstanding balance of the month is carried forward to the next month, you pay interest on the total amount. The more you push back, the more you pay. That’s why it’s good to pay as much as you can right away. Compound interest can be considered an interest on interest, in which you pay interest on the initial total amount plus the interest you owe each month. Essentially, you pay double the interest because of the time it takes to pay. This will raise the overall total amount due to a much higher amount than expected.

 

How to use a credit card responsibly

How to use a credit card responsibly

It’s important to remember that having a credit card does not mean you have money. Having a credit card actually means that you owe money.

To use your credit card responsibly, follow these suggestions:

  • Pay the total amount of your remaining balance
  • Pay your credit card bills on time
  • Work on building and increasing your credit
  • Do not use your credit card as a debit card
  • Do not let your friends use your credit card
  • Do not go over your budget
  • Monitor your expenses on a weekly basis
  • Before you tap Accept, ask yourself if you really need this article or just want it. If the answer is: I want it !, do not buy it.

 

How does a credit card affect your credit rating?

How does a credit card affect your credit rating?

Your credit rating is a number representing your credit and ability to repay a loan. This score fluctuates according to certain purchasing behaviors and actions. If you do not pay your credit card bill on time or with the minimum amount, your credit rating will decrease.

However, by paying on time and in full (or the minimum amount), your credit rating will increase, proving that you are responsible and worthy of a line of credit. This will give you the opportunity to work on improving your credit history and expanding your eligibility. Thus, it is clear that having a credit card can be good or bad for your credit rating, it depends on how you use it.