From November 16th to 30th get no interest on the last 6 months of your loan with our partner easyfinancière.
The Minimum Payment Trap
Loans Canada: The Country's Best Loan Comparison Platform
Having a healthy financial future is usually a top priority for the average person. Being able to get more credit, being approved for a loan or being approved for a mortgage are three extremely important financial goals, ones that require some work to achieve. More often than not a credit card is the first stepping stone towards building a better financial future. A credit card will allow you, from a young age, to build your credit history and credit score, therefore setting up the foundation for your future financial needs. If used properly and responsibly a credit card is a great financial tool, but if used irresponsibly you could damage your credit for years to come. Getting stuck in the minimum payment trap is one of the worst ways you can damage your credit and your finances in general, here’s what happens when you get stuck.
What Is The Minimum Payment Trap?
When you use a credit card you are borrowing money that isn’t yours, you are then meant to pay it back in a timely manner. But because credit card companies are businesses and they need to make money, instead of paying off your balance in full you can make something called a minimum payment. If you choose to only make your minimum payment you will then be charged interest on the remainder of your balance, this is how a credit card company makes money.
The minimum payment option is there for a reason and can be a useful tool if treated properly. But if misused the minimum payment can turn into a trap that is almost impossible to get out of. Once you start only making the minimum payment on your credit card each month the amount of interest you’re charged will accumulate quickly and your debt will start to grow before your eyes.
What Are The Consequences?
Getting stuck in the minimum payment trap will affect almost all aspects of your financial life and can even start to affect your personal life. It’s important to understand how choosing to only make the minimum payment required on your credit card bill will affect your finances now and in the future. Below are some of the consequences you can expect to deal with.
Lower Credit Card Score
A large percentage of your credit score (30%) is made up of how much debt you have. This means if you have a large amount of debt that isn’t being paid off, your credit score will without a doubt be negatively affected. Your credit score is your financial life line; it shows future lender whether or not they can trust you with their money. A low credit score will prevent you from getting a loan or new credit in the future.
Your Bill Will Become Too Much to Handle
When you see the minimum payment option on your credit card bill each month it can be so tempting to simply pay that, much smaller, amount. The problem is once you start to only make the minimum payment required each month it can become very hard to stop. The interest will start to accumulate and your bill will more likely than not become too much to handle and you might get stuck in the minimum payment trap for years.
It Will Take Years to Get Out of Debt
Most credit cards will provide a chart that clearly illustrates how long it will take you to fully pay off the balance of your credit card should you continue to only make the minimum payments. If your credit card balance is in the thousands it could take upwards of four years to get out of debt. Next time you look at your credit card bill look to see how long it would take you to become debt free if you only made minimum payments, we guarantee you’ll be shocked.
How to Avoid The Minimum Payment Trap
Unfortunately we don’t have any cleaver tricks to help you avoid the minimum payment trap; you simple have to pay off your credit card bill in full every month. You can however figure out ways to reduce your spending so that when your credit card bill comes every month you aren’t shocked by the balance.
The best thing you can do is to use your credit card to buy things that you would normally buy and actually have the cash in your bank account to pay for. Live within your means and should be able to avoid the minimum payment trap.
Rating of 5/5 based on 1 vote.
Largest Lender Network In Canada
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Leap Financial helps consumers in British Columbia take the leap into financial freedom through personalized mortgage solutions.