Minimum credit card payments: why they can be dangerous for your finances

Minimum Credit Card Payments: Why They Can Be Dangerous for Your FinancesUsing a credit card has a lot of advantages. First, you can buy goods and services even if their value is higher than what you can currently afford. Second, credit card bills can be paid in installments. Third, credit card bills can be paid with a minimum payment scheme.

For example, if you buy an item for Rp1,000,000 with a credit card with a minimum credit card payment of 10%. Then, you can pay only Rp100,000 on that loan's billing cycle, while the rest is paid next month or the month after.

This certainly makes it easier for you to buy goods and services, right? But remember, paying your credit card bill with the minimum amount carries risks for your finances in the future. What are these risks? Check out the full explanation below:

1. You have to pay interest

If you pay in full before your credit card billing date, you won't be charged interest. For example, if you spend Rp1,000,000 on November 1, 2024, and the billing date is December 1. If you have paid off all your loans before December 1, then you won't be charged interest.

It's a different story if you only pay Rp100,000 during that period. Then, you have to pay a loan interest of 1.75% of Rp900,000. Remember, this interest will remain until your loan is paid off and will get bigger if you add more to your bill. For more technical details, you can check the simulation below.

2. Potential increase in debt

Did you know that the amount of installments and interest you pay on a loan can exceed the actual principal amount of the loan you took out? For example, you borrow Rp10,000,000 from the bank with a 12-month tenor and 6% interest per year. Then, at the end of the loan period, the total amount of money you deposit at the bank will be approximately Rp10,600,000.

The same thing will happen if you only pay the minimum amount on your credit card bill. This is compounded by the compounding nature of loan interest, which means interest on interest. For example, your remaining debt this month is Rp900,000 and the interest is 2%. If you don't pay it all off, the amount of debt you have to pay next month will be 2% times Rp918,000 and not Rp900,000 anymore.

3. Difficulty managing finances

The compounding nature of interest above will result in 3 things. First, you will have a harder time managing your finances. This is because you have to be aware of changes in the bill nominal you have to pay. It's not fun, right, if your credit card bill suddenly balloons because you are not aware of these changes.

4. Difficulty paying off debt

The second impact of the compounding interest rate is that you will have a harder time paying off your credit card bill. Especially if the amount of this loan bill is quite large. Moreover, if you consistently only pay the minimum amount on your credit card bill. The bottom line is, the less you pay your credit card bill, the longer it will take to pay off the loan.

5. Declining credit score

The last impact of minimum credit card payments and compounding interest rates is that your credit score will drop because your debt isn't getting paid off. Even though this credit score is important, you know, for building credit history and getting other loans from banks and other financial institutions.

Minimum Credit Card Payment Simulation

Does minimum credit card payment reduce the bill? The answer is yes. However, the bill reduction will not be as large as it should be. For more details, check out the minimum credit card payment simulation below:

Does minimum credit card payment reduce the bill? The answer is yes. However, the bill reduction will not be as large as it should be. For more details, check out the minimum credit card payment simulation below:When added up, the amount of money you have to pay to pay off this credit card bill will swell to approximately Rp1,305,000 including interest. This value will increase if you take out other credit card loans during the repayment period.

Credit cards do offer various payment conveniences. However, they must still be used wisely. Honest credit cards are equipped with the Honest App, so you can still control your spending carefully. With this credit card application, you can check the amount of interest, fees, and total credit card bills in real-time and transparently. So even if Honest has a credit card limit of 100 million rupiah, you can still use it carefully.