» The Problem With Minimum Payments
Credit cards are a powerful purchasing tool that must be managed correctly to prevent undue financial hardship. Most cardholders open a credit card account with the intention of paying the balance in full each month, but then an unexpected event occurs. The first time a balance is carried over, the debtor realizes that the minimum payment is an option that will leave some slack in the budget. A dangerous road lies ahead if the balance remains outstanding and minimum payments are made. Some of the most obvious perils include:
Paying the minimum required payment every month on a credit card balance does not provide a true assessment of the debt that is outstanding. Credit card statements reveal a remaining balance, but the next minimum payment will not be shown until more interest is added to the account. Every month the cardholder sees little progress and does not have an accurate picture of the entire obligation on the account.
One monthly credit card payment might be possible as long as the primary income remains stable and the family situation is unchanged. Multiple credit card payments begin to consume more of the budget and other bills begin to become a burden. The minimum payment method will obligate the cardholder for years of monthly payments with no return for the investment.
The strongest marketing gimmick used for selling merchandise is the enticement to “buy now and pay later.” Smart consumers realize that the money to buy the item must be present in the budget today, or their buying habits are placing a lien on their own future earnings. Financial obligations to credit card companies will last long after the purchased item has been used and discarded.
On-time monthly payments will prevent unwanted marks on the credit rating, but the habit of paying only the minimum amount on the credit card balance is visible by creditors. Managing debt is one of the factors for maintaining the credit scores in the highest brackets.
Credit card debt that remains unpaid over long periods of time is evaluated by every creditor when auto and home loans are sought. Creditors state that one of the most prevalent reasons for denying loans is because of the debt burden the applicant is under. Paying the minimum required payment on a credit card will interfere with larger financial goals.
The family budget may have enough margin to pay the minimum payment on one or more credit cards each month as long as both incomes are sustained. If an unexpected event causes the loss of one income, the first missed payment can cause a catastrophic cascade of missed monthly payments. Instead of paying off the balance quickly, the family will end up with damaged credit and unsustainable obligations that cause undue hardship.
Paying off the entire credit card balance can seem impossible if every other dollar in the monthly budget is committed. Habits must change to eliminate the use of the credit cards to reveal the true cycle of debt that has been established in the life of the family. If groceries and entertainment are automatically charged to the credit card, the cycle has reached the point that is very near default.
One of the first steps to breaking the cycle of paying only the minimum payment each month on each credit card is to take a hard look at the entire household budget. If there is absolutely no money to pay more than the minimum payment on one card, some expenses are going to have to be cut, and hard choices must be made. Financial advisers are available to assist with the steps that must be taken to correct the situation and eliminate the debt. Health financial habits can be learned, and the discipline to manage the family budget can be shared by every member.