Debt Consolidation USA Explains the Dangers of Minimum Credit Card Payment

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Debt Consolidation USA discuss the negative effects of minimum credit card payments on a consumer's finances. It affects the present payments and future loan applications.

interest payments are frontloaded

Debt Consolidation USA shares in an article published last June 06, 2014 the negative effects of minimum credit card payments. In an article titled “3 Ways The Credit Card Minimum Payment Slowly Kills Your Finances” highlights some important points as well on how minimum payments affects future loan and credit applications

The article explains that making the minimum payment does prevent the borrower from entering delinquency but this practice could do more damage than good to a credit score. Minimum payment is the lowest acceptable payment for a credit card balance. What used to be 2% of the balance is now around 3% to 5% which depends on the lenders prerogative.

One of the negative effects of making just the minimum payment on a credit card is being in debt for a long time. The article explains that the consumer will inevitably prolong the debt payment if only small payment amounts are sent in every month. The payment would not barely touch the principal amount and most of it would just be applied as interest payment.

Another downside to minimum credit card payment is the amount of interest payment made throughout the life of the loan. The more the borrower opts to stick with minimum payments, the more interest is charged and paid. It doesn’t help the fact that interest payments are frontloaded and principal payments aren’t paid much until the latter payment stages.

The article also discusses that this attitude can develop a less than admirable payment behaviour. Consumers can be lead to believe that purchasing high ticket items is possible because monthly payments are low. This underscores the fact that interest payments on the item is taking a big part of the income which could have better use elsewhere, like an emergency fund.

Making minimum payments on the credit card can also spark some questions and intrigue when the time comes the consumer applies for other loan and credit tools with lenders. It is no secret that one of the major considerations to be granted a loan is the credit score. And making the minimum payments would reflect nicely on the score as it prevents delinquency and shows proof of capacity to pay. But when lenders start reading between the lines, they can ask some hard questions.

The article explains that one drawback of minimum credit card payment with lenders is the assumption that the borrower has questionable income that prevents above minimum payments. There are also some analysts that interpret minimum payments as a few dollars away from defaulting on payments increasing risk profile of the borrower.

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Adam Tijerina
since: 04/2012
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