Credit cards: beware of the minimum payment trap

Credit card companies often promote rewards and cash-back programs to encourage spending. However, these programs can make it easy for you to build up a balance that’s difficult to repay. Your debt load may make you feel inclined to make only the minimum required payment each month.

Here’s how that habit can be detrimental to your finances.

A cycle of debt

Paying the minimum balance keeps your account in good standing; that’s better than not paying anything at all. However, interest still applies to the remaining balance. If making minimum payments becomes your routine month after month, that interest accumulates on top of your new purchases, causing your debt to grow even faster. 

Over time, your credit card debt can increase significantly, and you may be stuck with it for multiple years. Even though your credit score might not drop immediately, lingering debt can make it harder for you to qualify for a loan or mortgage later.

Better habits

If you notice your debt levels rising, start by reviewing your monthly expenses. Make a list of your essential and non-essential spending. This will help you spot areas where you can cut back and avoid impulse spending.

Whenever possible, pay off a little more than the minimum balance. You’ll pay less interest and clear your debt much faster. Also, focus on paying off credit card debt first, since it typically has the highest interest rates.

Do you need help managing your debt? Contact a financial advisor or licensed insolvency trustee.