Just like it says on the name, minimum payments are the lowest amount that you have to pay on your credit card each month. While it sounds convenient, paying only the minimum amount every month will actually cost you more, and not knowing how minimum payments work can be quite misleading.
What is a minimum charge?
In the financial sense, a minimum payment is the lowest sum set by the banks to allow the clients to use their credit cards even with an outstanding balance. Also, paying the minimum inhibits additional charges such as late fees.
How much is the minimum charge?
The minimum payment is usually a percentage of the account’s balance, which is around 5-10% of the total bill. This means that if you have a balance of PhP 10,000, the minimum fee you can pay to the bank is between PhP 500-1,000. While this allows you to use your card again, paying only the minimum proves to be more expensive in the long run.
Why Has This Become A Problem?
The only reason why banks allow minimum payments is to prove that you are still capable of owning a credit card. However, settling your bill by only paying the minimum is much more expensive.
By simply settling your dues with the minimum, you are merely scratching the surface as your account still accumulates interests over the unpaid balance. Even after you deduct the lowest possible amount from your dues, you are merely paying off the interest that grows over time from the unsettled amount—and it keeps on growing until you’re able to settle it. By the time you’re able to pay off everything, you’ve actually paid more than twice of your original credit!
(See Related Topic: How To Score Freebies With Your Credit Card)
How to avoid the downward spiral of minimum payments?
The best way to avoid hefty interests due to minimum payments is to avoid them at all cost. However, there are times when paying the minimum is simply unavoidable, and next thing you know, you’ve been doing it for quite some time.
Another option you can take to get out of the minimum payment quicksand is by asking your credit card publisher to change the date. For instance, if your bill arrives in the middle of the month, you can perhaps ask them to reschedule and move it to the end of the month. That way, you can prepare to pay a bigger amount or maybe even settle your dues once and for all.
If you are already running out of options, you can always persuade your credit card issuer for a debt restructuring. Also known as debt rescheduling or refinancing, financial institutions will provide borrowers who are neck-deep in their debts some form of relief such as delay in due dates and reduction of monthly payments by extending the payment period. Each bank has a different policy for debt restructuring, but the idea is always to make the interest much lower than making minimum payments. Even the Bangko Sentral ng Pilipinas urges clients with serious credit card debt issues to seek the aid of banks for debt restructuring.
Minimum payments exist only to give us breathing room before we finally settle our loans. However, the moment we start paying only the lowest possible amount every month, not only we are throwing away hard-earned money, we are also destroying our financial credibility, as well.