If you have a credit card, you should, theoretically, know how missing a payment or paying off less than your total balance each month can lead to a debt spiral. The interest rate on credit cards is very high compared to other financial products, and it compounds when you don’t pay your balance off in full each month.
And credit cards make it easy to fall into that debt spiral. One way they do this is that your issuer will display the “minimum balance due” each month prominently on your bill/online account, and if you don’t know any better and continually pay off just the minimum, you can end up owing a lot more money over the long term.
CNBC explains how paying off just the minimum each month can add up quickly:
The average household with credit card debt owes roughly $8000. If you only paid the minimum on a $7000 debt at the current average interest rate, you’d be in debt for over 18 years and pay roughly $16,100 in interest.
As Lifehacker previously wrote, some issuers’ minimum payment is as little as one per cent of your total balance. And while they say this gives you, the consumer, more flexibility, it’s really just a way for them to profit off of you. (That said, if you’re in a period of financial strain, a minimum balance does allow you to keep creditors off your back until you get back on your feet.)
That’s why it’s important to think of a credit card as a tool, and use it as a means to an end. It’s easy to spend more than you can afford, but you should only charge as much as you can pay off in a single month. Credit card companies are counting on the fact that you won’t.