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5 Reasons Why You Absolutely Must Pay More than the Minimum Due Each MonthDecember 27, 2016
Admit it – one of the reasons why you love your credit card so much is that it allows you to purchase items that you probably don’t have the money to buy today ... and defer payment to sometime in the near (or distant!) future. Let’s say you go to an electronics store to purchase a replacement for your kitchen refrigerator bulb. However, while you’re there, your attention is grabbed by a cool flat-screen television – the kind you’ve always wanted for your den. You want to buy it immediately, but there’s a slight problem – it’s the end of the month and you don’t have enough funds in your bank account. Under ordinary circumstances, you would have convinced yourself to forget about the item, and gone on your way. But if you have a credit card, you may just put the $1,000 purchase on it and set off for home, proudly carrying your trophy.
It’s okay to put purchases on your credit card, no matter how big they might be, if you pay off the entire amount quickly. Nevertheless, what most people tend to do after racking up a balance is to make only the minimum payment each month. Since this amount is quite low – either a fixed small amount, say $25, or even 1-2% of the balance, consumers hope to free up money for other financial goals. However, what they don’t realize is that this act ends up costing them more in the long run.
Here are a few reasons why you should always pay more than the minimum amount due on your credit card.
1. Save on Interest
The longer you carry a balance on your credit card, the more you’ll end up paying in terms of finance charges. In fact, it’s not uncommon to find consumers paying more than the original cost of an item in interest! Thus, by paying more than the minimum balance due each month, you can quickly reduce your balance and save hundreds, or even thousands, of dollars.
2. Get Out of Debt Quickly
Paying only the minimum amount due means that you’re effectively paying just a portion of the entire accrued interest. This way, your debt piles up. Now you not only have most of the original balance outstanding, but also the ever-increasing interest amount to pay. The only way to get out of this predicament is to pay more than the minimum, so that some of the amount goes towards meeting interest payments as well as reducing your balance.
3. Improve Your Credit Utilization Ratio
Your credit utilization ratio is calculated by comparing the amount you owe on your card to your credit limit, and constitutes 30% of your credit score. For best results, this percentage should always be kept below 30% – or you may see a decline in your score. By paying more than the minimum amount due, you can chip away at your overall balance, thereby bringing down your ratio and making space for more purchases.
4. Enhance Your Credit Prospects
In the near future, if you want to qualify for a loan, such as another credit card, mortgage or car loan, you’ll need to reduce your existing debt. If you don’t, you may find that you’ve been rejected, or that you are asked to pay higher interest rates on your loan. The best and easiest way to reduce your debt is to pay more than the minimum on your credit card. (Click here for more tips on how to reduce your debt and improve your credit score.)
5. Increase Your Available Credit
The best aspect of having credit is that it provides a financial resource in times of true need when you’re temporarily short of funds. If you pay just the minimum amount due on your card, your used credit will continue to be high, and you may not be able to use your credit card when you most need it. Thus, to make your card accessible again, you’ll need to pay down your balance by remitting more than the minimum due each month.
The main reason why minimum payments tend to backfire is because of the high interest costs associated with credit cards. Many consumers use cards as a source of funding. Instead of taking out a loan for their small business, they put the expenses on their credit card and then keep on deferring the entire payment by paying just the minimum amount due each month. However, in this manner they end up accruing hundreds or thousands of dollars from interest. For such people, a better option is to approach our team at Fund&Grow. Through creative credit card financing, we help clients with good credit obtain $50,000 - $250,000 of unsecured credit at 0% interest. For a flat fee, we not only assist them, but also take care of most of the paperwork ourselves. So, if you need credit in that range, instead of maxing out your existing credit at high rates, call us at (800) 996-0270, and we’ll do our best to help you out.