Contrary to popular advice, paying more on your credit cards isnâ€™t always the best option
Rules and finances go hand in hand. For example, it’s easier to save 10 percent of each paycheck than to figure out how much to squirrel away every month. But every rule has an exception, particularly when it comes to paying off credit card debt.
“It’s a great rule to say always pay more than the minimum,” says Mike Sullivan, a personal finance consultant with Phoenix-based credit counseling agency Take Charge America. After all, if you pay only the minimum, it will take you longer to pay off the debt and you’ll pay more interest over time. The minimum payment warning box on your credit card statement will tell you just how long it will take you to pay a card off by making only minimum payments.
There are some cases, however, when paying more than the minimum can lead to more financial and emotional stress, experts say. Here are some times when you might want to take a slower approach to digging yourself out of credit card debt.
1. You have no emergency savings. While it doesn’t make sense to have thousands sitting in the bank while you’re drowning in credit card debt, “if you don’t have at least $500 in emergency savings, then you need to focus on that, even if it means only making the minimum payment on credit cards,” Sullivan says. Without a small rainy day fund, you’ll be reaching for your credit card the next time you have a flat tire or the furnace needs a minor repair. Focusing on amassing a small emergency fund can also help you to get into the savings habit, Sullivan adds. However, once you have $500 or $1,000, don’tstop saving entirely, but scale back and increase those credit card payments again.
2. Upcoming hardship looms. Sometimes we can spot dark clouds on the horizon early enough to prepare. For example, rumors about looming layoffs at your job might prompt you to not only dust off your resume, but to make minimum payments and bank the extra money. You might also adjust your credit card payments to prepare for another major expense. “Let’s say that your \u2018check engine’ light comes on, and you have no extra money, but you’re really concerned if you don’t take this car in it could break down,” Sullivan says. You might opt to save for the repair by making minimum payments on your credit card debt temporarily. Once the expense or crisis has passed, go back to paying more on your cards.
3. You owe the IRS or are behind on child support payments. The worst thing that can happen to you if you only make minimum payments on your credit cards is you’ll pay more in interest over time. If you don’t pay your taxes, not only will you face financial penalties and interest, but if you fail to make payment arrangements with the Internal Revenue Service (and keep them), you may have your wages garnished, bank accounts levied or have a tax lien put on your property, says Dennis Brager, a Los Angeles-based tax attorney. In rare cases, you may even face jail time. “The real penalty is the IRS comes and gets this money and disrupts your life in the process,” Brager says.
Child support is another bill you might want to put before extra credit card payments. According to the Office of Child Support Enforcement, a parent who does not pay his or her child support can face such penalties as having income withheld, a passport denied, or licenses suspended.
If you don’t have at least $500 in emergency savings, then you need to focus on that, even if it means only making the minimum payment on credit cards.
|\u2014 Mike Sullivan|
Take Charge America
4. You have medical bills. Twenty percent of working-age Americans with health insurance and 53 percent who are uninsured have problems paying medical bills, according to a 2016 survey by The Henry J. Kaiser Family Foundation and the New York Times. “People are paying a lot more out of pocket than they did in the past,” says Jordan Goodman, author of “Master Your Debt: Slash Your Monthly Payments and Become Debt Free.” To free up money to get your health expenses under control, it may help to scale back on credit card payments, Goodman suggests.
5. A bill is causing extreme anxiety. Sometimes a particular debt will cause emotional distress, such as money you borrowed from a relative or a debt that has a bill collector hounding you everyday. There are financial reasons to pay a debt and psychological reasons to pay a debt, Goodman points out. If paying something off will help you sleep better at night, it might be worth making minimum payments on credit cards temporarily to do so.
6. You have costlier debt. If your credit card has a low or promotional interest rate, you may have a car loan or another financial obligation that’s more costly. In this case, it may be more logical to attack the higher interest loan first even if it means making the minimum payment on your credit card, Sullivan says. However, remember that promotional rates will rise again, so there is a value to paying the card off before the promotional period ends.
Sometimes circumstances will demand that credit card payments take a back seat to other obligations. But once those circumstances have passed, go back to making more than the minimum payment, Goodman says. “Paying off credit card debt has got the highest rate of return of any investment out there.”
See related: How minimum payments are applied to small balances, Will making minimum payments damage your score?