Have you ever heard one of your sports coaches at a practice or game tell you that the expectation was to simply show up and put forth the least amount of effort possible?
Neither have I.
So why would the expectation you have for yourself and for your finances be any different?
Minimum Payments
When you log in to you credit card account each month and you see those two alluring words staring back at you, resist the temptation. Making minimum payments on your credit card each month is putting yourself at a disadvantage financially as interest continues to work against you.
Is it natural that, at some point in time you were only able to make a minimum payment on something because you didn’t have the funds to cover it in full at the time? Sure. The essence of purchasing something on credit is that you can’t cover the cost right then and you need to make payments over time. While not ideal, it does happen, and sometimes the minimum is the best you can do (ohh college…).
The key is not to get in the habit of doing it, and when taking out credit, context is important.
If you find that you are consistently making minimum payments, you may want to spend some time assessing your financial position.
How long have you been making minimum payments for? How many credit cards are you making minimum payments on, and what are their total balances? Are you carrying other forms of debt…perhaps a personal or home equity loan? A student loan or car loan?
If you find that you are making minimum payments on several lines of credit, and on high balances relative to your income each month, you are likely overextended.
Example
Luis has a pre-tax monthly income of $3700.
His total debt payments each month are as follows:
Mortgage – $1200
Car Loan – $450
Student Loan – $300
Personal Loan – $250
Luis also carries credit card balances totaling $10,000. The card issuer’s monthly minimum payment is 1% of the balance, bringing the payment to $100/month.
Credit Cards – $100
Total Monthly Debt Payments = $2,300
To get a feel for where Luis’s debt payments stand in relation to his income, he calculates his debt-to-income ratio by dividing the total debt payments each month, by his pre-tax monthly income. The ratio is then expressed as a percentage.
$2,300 (Debt)/ $3,700 (Income) = .62 or 62%
With his ratio sitting at 62%, it isn’t difficult to see why Luis can only make minimum payments on his credit cards. Over half of his income is already earmarked for debt payments.
Also consider how deceptive each monthly minimum payment is when you look at them individually. $100 each month in credit card bills doesn’t seem like a significant sum, until you consider that the $10,000 in total credit card debt alone that he carries is nearly a quarter of his $44,400 annual salary! This is of course before he pays his mortgage, car loan, student loan, personal loan, food, gas, and insurance…
Be Your Own Coach
Credit should be used responsibly and sparingly.
Doing the minimum is not the expectation. It’s not your expectation.
If you find that you are paying the minimum each month on a large amount of debt, consider ways to downsize your lifestyle.
In the end, be your own coach. Your finances depend on it.