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So you've got a credit card and you've been using it to buy all the things you need (and some things you don't). You've been paying the minimum balance every month and life is good, right? Well, not so fast. Here's what really happens when you only pay the minimum balance:
When you only pay the minimum balance on your credit card, you're barely making a dent in the amount you owe. In fact, if you look at your statement, you'll see that most of your payment is going towards interest, not the actual balance. That means you're going to be paying off your credit card for a loooong time.
When you're only paying the minimum balance, you're not making much of a dent in the principal amount that you owe. This means that you'll be paying back your credit card debt for a very long time, even if you're not using your card anymore.
Speaking of interest, did you know that credit card interest rates are usually pretty high? That's right, you're paying extra money just for the privilege of borrowing money. And when you only pay the minimum balance, you're paying a ton of interest. Like, a ton. Seriously, go look at your statement again. See how much of your payment is going towards interest? Yeah, that's a lot.
Most credit cards have an interest rate that ranges from 15-25%. That might not seem like a lot, but when you're carrying a balance and only paying the minimum amount due, that interest can add up quickly. For example, if you have a balance of $5,000 and an interest rate of 20%, you'll end up paying over $14,000 in interest alone if you only make the minimum payment each month. That's more than double the amount you originally charged on your card!
Believe it or not, your credit score is affected by how much credit you're using. And when you're only paying the minimum balance on your credit card, you're using a lot of credit. That means your credit score is going to take a hit. And when your credit score goes down, you might not be able to get approved for loans, a mortgage, or even apartments.
Your credit score is a reflection of how well you manage your credit. When you're only paying the minimum balance on your credit card, it indicates that you're not able to pay off your debt in full each month. This can make lenders hesitant to give you credit in the future, as it shows that you may not be able to handle your debt responsibly.
So there you have it. When you only pay the minimum balance on your credit card, you're setting yourself up for a long debt freedom journey, paying a ton in interest, and damaging your credit score.
Next time, try to pay more than the minimum balance, and you'll be on your way to debt freedom at race car speed (with a better credit score).
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