Your credit card company calculates your monthly minimum payments based on a number of factors. Sadly, none of them include how much you’re actually able to pay.
If you’ve ever had to contemplate making financial sacrifices in order to meet the minimum payment on your credit card, you might have considered skipping the payment or simply paying less. However, before you see paying less than the minimum as a solution to your credit card bill woes, there are some things you should know.
What happens if you pay less than the minimum payment?
Paying less than the minimum payment is actually considered the same way as making no payment at all. And non-payment for a credit cycle has some pretty serious implications. For starters, you will end up paying more for your next billing cycle. You could incur a fee of up to $39 (that’s the maximum credit card companies are allowed to charge) and higher penalty interest. In a worst case scenario, you may be forced to pay off your entire balance for the next billing cycle.
Another consequence of paying less than the minimum payment is the effect on your credit score. Payment history makes up a substantial part of your credit score (35%) and non-payment will lower your score. Being delinquent on a payment will also stay on your credit report for seven years.
What if you can’t make your minimum payment?
If you are not able to make your minimum payment for the month, the best thing you can do is call your credit card issuer as soon as possible and let them know what’s going on with your financial situation. If you are experiencing a change in income due to a divorce or a change of employment, you may be eligible for a hardship program to help pay off your balances. A successful call with your lender would involve you being candid about your current income and your lender offering to lower your monthly payment for a time frame of three to six months to help you get back on track.
While a successful conversation may end with you getting a break on your payments, that is not always going to be the case. You phone call could also trigger consequences that are less than favorable. Remember, your agreement with your creditor states that you will make regular payments. If you are going against that agreement, your creditor may view you as an increased risk and raise your interest rate or even move to close your account. However, starting a conversation with your lender will have a better outcome in the long run than having no communication at all and simply missing payments.
If you foresee not being able to make payments as a long term issue, another option is to elicit the help of a debt counselor. A debt counselor can act as an intermediary between you and your card issuer to help create a repayment plan. Going to a debt counselor is not a magic wand and you will still be responsible for making payments. However, they can help you come up with a repayment plan that will work for your current situation.
How to budget for your minimum payment
Maintaining good credit comes down to good planning. Sit down with your credit card statements and map out how you are using your card. What card purchases are recurring? Are there places where you can pull back on your spending? Create a budget that factors in your monthly income and your monthly spending. Use a budget calculator to help.
You can also use a tool like a credit card minimum payment calculator to see what your minimum payment will be and how long it will take to pay off your credit card by just paying the minimum.
When it comes to debt management, especially when dealing with credit cards, knowledge is power. Taking time to calculate a budget based on your income will help you know how much you are able to pay on your debts and ultimately how much you can afford to spend on your cards.
The bottom line
Having a credit card means that you have certain payment responsibilities. Payment history makes up more than a third of your credit score, so paying your credit card bills consistently will keep your credit score in good standing and give you access to more credit options. If your current situation makes it hard to keep up with the minimum payments on your bill, talk to your credit card issuer to see if you can negotiate a short term solution to help you get your finances back on track. If you’re regularly struggling to make payments, focus on creating a budget to balance your income and spending so that you can at least make the minimum payment each month. If you need help, reach out to a debt counselor who can assist with budgeting and may be able to negotiate a suitable repayment plan with your credit card issuer.