Consumers who receive a credit card bill every month will likely note that the statement comes with a required minimum payment, and it can be tempting to send off a check for only that amount.
But making the minimum payment can have a significant negative impact on a borrowers’ finances in the long term even if it seems to make sense at the moment, according to a recent post from advice site Lifehacker. Many Americans are still struggling financially and are therefore more likely to make only the minimum payment, but this is not always a great idea. For one thing, only paying the minimum will eventually lead to far more significant costs as a result of the interest that’s racked up on these accounts. And conversely, when making payments above the minimum, the additional amount above that stated total must be applied to the principal, not interest charges, meaning that borrowers reduce their balance more quickly.
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However, for this reason, it’s also important for consumers to make sure they are conscious of which accounts they’re paying above the minimum, Lifehacker says. Often, people might not have the ability to make sizable payments every month into every one of their cards, so they should focus instead on making sure they pay down the cards with the highest interest rate first.
The reason for doing so is obvious: it costs less in the long run to reduce the balance on the card with the highest rate than the one with the lowest or even a moderate rate. Then, once the card with the highest interest rate is paid off in full, they can move on to the next one, and so forth, until all debts are paid down. However, it’s important to note that while this process will generally have a positive impact on consumers’ credit standing and finances, it also takes patience. This process can take months or even years to completely reduce all debts to zero.
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And while trying to pay down cards’ balances, it’s also important that consumers make sure to not spend any more on the accounts, so that they’re not adding to their financial concerns even as they’re trying to reduce them.