Why you should pay more than your minimum payment

Minimum payments are an easy thing to slip in to.  This is for a number of reasons.  Firstly many direct debit options will only allow for minimum payments.  It can also be tempting to simply pay the minimum payment in order to free up resources.This is often a mistake and almost all credit card borrowers should be making a conscious effort to pay off more than their minimum payment every month.

Credit cards have very high interest rates compared to other forms of borrowing.  This is for two good reasons.  Firstly they are harder to administer than other loans as they can be added to at any time and the amount that they can be paid off is not fixed.  They are also unsecured, so a lender is not guaranteed that they will get their money back if the borrower defaults.

This means that the longer card debt is allowed on a card then the higher the amount that will eventually be paid off.  This is increased through compound interest, which is essentially the interest on the interest that has been previously charged.  A small increase in the credit card repayment rate can have an outsized influence on the amount of time that the repayment can take to pay off the whole of the credit card debt – as well as the amount of total interest that is charged throughout the lifetime of the credit card.

It is always a good idea to pay more than the minimum payment in order to pay off the card.  If it is hard to make up more than the minimum payment then this is an early warning sign that the credit card borrower is in financial trouble and needs to re-examine their finances.If there are regular payments into a savings account while only the minimum balance is being paid off then this will need to be re-examined.  The amount of interest that can be saved on a credit card is in almost every case greater than the guaranteed income from any savings or investment product.

To maximise the effects of repayments, the card holder should concentrate on paying off the most expensive card balance that they have.  This means that while the cheaper balances are paid off at the minimum rate the extra repayments should concentrate on the card with the highest interest rate.  This can radically reduce the amount of interest charged over the lifetime of the credit cards.