The Downside of Only Making Minimum Payments on Credit Cards

Sometimes people have no choice but to rack up a balance on a credit card and pay it off over time, rather than in one fell swoop. Maybe you had an unexpected car or home repair you had to charge in the absence of having enough cash in your emergency fund to cover it.

You may, for a period, only be in a position to make your minimum credit card payments. And that's understandable. If you're paying off an unexpected bill, it's not as if you really had time to prepare.

But while it's one thing to only make your minimum payments on your credit cards for a period, it's another thing to pretty much always uphold that practice. Doing so could hurt you in more ways than one.

You might end up paying a boatload of interest

Credit card companies are in the business of making money on interest. So they're perfectly OK with you making only your minimum payments because that will simply prolong the life of your balance and allow more interest to accrue against it.

You, however, should not be OK with that. If you only make your minimum payments, you're basically signing up to lose money to interest.

Let's say you owe $3,000 on a credit card charging 18% interest. If you only make your minimum monthly payment of $90, it will take you 166 months, or close to 14 years, to get rid of that debt. During that time, you'll also end up accruing about $2,700 in interest, which is pretty darn close to the original amount you charged on your card in the first place.

You might cause damage to your credit score

Multiple factors go into calculating your credit score, and the two that carry the most weight are your payment history and your credit utilization. The former speaks to how timely you are with your bills, and the latter speaks to how much of your available credit you're using at once.

Making your minimum monthly payments will mean you're current on your bills, so that's a good thing for your payment history. But if you continue to let interest accrue on your credit card balance, it will grow, thereby leading to a higher level of credit utilization.

The result? Your credit score could take a hit. And once that happens, you might have to settle for a less favorable interest rate the next time you need to sign a personal loan.

Don't stick to only paying those minimums

It's easy enough to fall into a pattern of only making your minimum payments on your credit cards. But as you can see, doing so could really mess you up financially, and you don't deserve that.

Instead, one thing you may want to do is comb through your expenses and identify a few small ones to cut. Take that extra money and apply it to your credit card balance, so you're paying more than your minimum payment every month.

At the same time, consider looking to the gig economy to drum up extra cash. You don't have to commit to a side job indefinitely -- just long enough to make good headway on your balance.

Remember, only making your minimum payments is a good way to ensure that your debt lingers longer. If that's not appealing, then take steps to chip away at your balance faster.