Do you get charged interest if you pay the minimum?

The Minimum Payment Myth: Why It Costs You More

Credit card companies often promote the minimum payment as a convenient way to manage your account. But this seemingly simple option hides a significant cost: continued interest charges. Understanding how these charges work is crucial to avoiding a debt trap.

The truth is, paying only the minimum payment on your credit card rarely saves you money. In fact, it usually costs you significantly more in the long run. While meeting the minimum payment avoids late fees and keeps your account in good standing, it does absolutely nothing to eliminate the interest accruing on your outstanding balance.

Unless you’ve secured a credit card with a temporary 0% introductory Annual Percentage Rate (APR), interest will continue to accumulate daily on your remaining balance. This means that even if you dutifully pay the minimum each month, the interest keeps compounding, adding to your total debt.

Imagine this scenario: you have a $1,000 balance on a card with a 18% APR. Your minimum payment might be a seemingly manageable $25. While that $25 reduces your principal balance slightly, the vast majority of your payment will go towards the accrued interest. This leaves a nearly identical principal balance the following month, onto which even more interest will be added. This cycle repeats, slowly chipping away at the principal while significantly increasing the overall interest paid.

The effect is a prolonged repayment period. Instead of quickly paying off your debt, you’re essentially paying interest on interest, exponentially increasing the total cost. This is why paying more than the minimum is always the more financially savvy choice. Even small extra payments significantly shorten the repayment period and reduce the total interest paid.

So, the next time you see that minimum payment suggestion, remember that it’s a lifeline to avoid late fees, not a shortcut to debt freedom. While meeting the minimum is better than missing payments, proactively paying more than the minimum is the key to effectively managing credit card debt and saving substantial money in the long run. Consider creating a budget, exploring debt consolidation options, or speaking to a financial advisor if you’re struggling to manage your credit card debt effectively. Don’t let the minimum payment myth cost you more than it saves.