Singaporeans are generally disciplined when it comes to using credit cards. According to the MAS, about 64% of cardholders in Singapore pay their balances in full every month, which suggests that the cards are used mainly for payment and for earning rewards or rebates.
Making only the minimum payment on your credit card bill is without a doubt one of the worst credit card mistakes you can make.
In case you were wondering – the minimum payment has this name because you have to pay at least this much to avoid incurring an additional "late payment fee" on top of your outstanding credit card balance.
In fact, it can be pretty tempting to just make the minimum payment and roll over the rest of the balance to the next month. The debt is growing rapidly with interest but you wouldn't really feel the pinch from day to day.
The rational part of us knows that this is an illusion, but alas, we humans are complex creatures.
In fact, about 20% of credit card holders in Singapore fall prey to the trap of paying only the minimum on their credit card bill each month.
If you're wondering just how serious minimum card payment is, consider these three things:
1. Your Debt Snowballs With Compounded Interest
The typical interest rate that applies to credit card debt is not only terribly high (often 20% or higher); it is also compounded on a monthly basis.
Let's say you have a credit card bill of $3,000 and you only ever make the minimum payment. We'll assume the minimum payment is 5% of the balance or $50, whichever is higher, and the interest charged on your outstanding balance is 20% p.a. (that's about 1.67% per month).
In the first month, you incur interest of $50. Your minimum payment of $150 is first used to pay off the interest, and then to reduce the $3,000 bill. An outstanding balance of $2,900 is rolled over. The next month, you incur an interest of $48. Again, your minimum payment of $145 is first used to pay off the interest before paying off the outstanding balance, and so on.
Ultimately, it will take you close to 5 years to pay off the bill, and your total interest bill comes up to about $1,200 – almost half of your original bill.
2. You Can't Keep Using The Card
Even while making only the minimum payment required, you can still be tempted to keep using your credit card. But that is simply not sustainable.
What happens if, in the earlier scenario, you continue to add $500 each month to your bill while only making the minimum payment? Theoretically, there's no way you would ever pay off the ballooning debt. Also, you wouldn't get very far because you'll hit your credit limit in no time.
3. Paying Even Just A Little Bit More Is Worth It
What if, instead of paying only the minimum sum, you tried to pay off the loan sooner by making at least the minimum payment or $100 each month, whichever is higher? You'll be debt free faster and the total interest bill is cut down.
Taking it a little further, what if you resolved to pay back $200 each month? You'll be debt free even sooner.
If you're already using all your available cash to pay off another debt, then perhaps it makes sense to only make the minimum payment on your other cards so that you can avoid the late payment fee.
Otherwise, avoid settling for the minimum – your bank account will thank you in the long run!
Always strive to pay in full each month, but if you really can't, try your best to pay more than just the minimum payment!