Why you should avoid paying only the minimum each month
Since credit card interest is calculated on a daily compounding basis, if you only pay the minimum balance each month, the remaining amount continues to roll over and grow every day. In the example, you will hit your credit limit of $5,000 in approximately 1 year.
When this happens, you will no longer be able to spend on your credit card and have a hefty balance to repay. Your minimum payment every month would have jumped from $50 to $150 (3% of $5,000) – taking you 197 months (16.4 years!) to clear that one year of spending. In total, your interest charges on the $5,000 spend would amount to $15,473.
Having to pay the credit card bill for more than 16 years can strain your monthly financial resources, leaving less cash on hand for other expenses.
If you have outstanding amounts, there are 2 components- the total remaining balance, and any outstanding interest charges.
It is worth noting that when you pay only the minimum amount due on your credit card, this always goes to paying any outstanding interest charges first. This means that if you pay only the minimum and it is less than the outstanding interest charges, you are not reducing your outstanding balance at all.
Not paying your credit card bills on time will affect your personal credit rating and ability to secure another loan or the amount you can get. This can come as a rude shock to young couples trying to apply for a home loan, only to discover the amount they are eligible to borrow is limited due to their past credit repayment behaviour.
In extreme situations, if the amount of debt exceeds S$15,000, bankruptcy proceedings may be initiated.
A warm fire is essential for life, such as for cooking or keeping us warm in winter. But if the fire is unbridled and unwatched, it can easily burn our houses down.
Similarly, a credit card may offer us a host of benefits, but unbridled and unwatched, it can leave us in heavy debt, or worse – bankruptcy. As with the analogy of fire, the key lies in how we choose to oversee and manage the use of these resources available to us. If you feel that a credit card is too much of a hassle for you at your life stage, you may also opt to use other suitable payment cards.