Credit payments can be overwhelming, especially if you’re trying to maintain several accounts. Sometimes it may seem like the minimum payment you are supposed to make is the only money with you. But even at that, paying less than the minimum you are expected to pay on your credit can have serious consequences that could lead to financial ruin. This is the reason you need to have knowledge of the implications of paying less or not paying up to the minimum agreed on your credit. I am going to explain these consequences here.
What is paying less than the minimum on credit?
When you make a payment that is lower than the minimum amount required by the credit card issuer, you are paying less than the minimum amount due.
The smallest monthly payment you must make to avoid late fines and bad credit reporting is the minimum amount owed.
A late fee and possible credit score harm will be charged if you are paying less than the minimum amount due.
If, for instance, your credit card company demands a minimum payment of $25 per month and you only make $15, your account will be seen as being past due.
A late fee, higher interest rates, and damage to your credit score may come from this. To maintain a good credit score and prevent extra costs, it is recommended that you pay more than the minimum amount required.
Like almost every other business organization, lenders will almost always accept any amount you send them: you owe them money, they want that money, so they won’t say no.
But when you sign a loan or credit card agreement, you agree to make a certain minimum payment each month. If you do not make this minimum payment, you are unfortunately in breach of contract. So, paying less is not a good idea.
Consequences of paying less on credit
Payments less or below the minimum will almost always be accepted, but your account will still be past due.
Your account will be late by the amount of your payment (if your minimum was $50 and you paid $30, your account will be $20 late).
In credit reporting terms, the account will be 30 days past due and will remain past due until you make the necessary payments to bring it current.
If you continue to be paying less or below what is required, your account will become progressively more delinquent and may eventually be charged and sent to charges.
Some other consequences include:
Late fees: You’ll probably be charged a late fee if you don’t pay your credit card balance in full or at least the minimum amount due. Depending on the card issuer, this cost may be anywhere between $25 and $40 or more.
Increased interest fees: If you use your credit card but only pay the minimum amount required, you will also be charged interest on the remaining debt. The cost of this interest can quickly increase, making it even more difficult to settle your credit card debt.
Damage to your credit score: Your credit score may be damaged if you skip a credit card payment or you are paying less than the minimum amount required. It may be more difficult for you to receive credit in the future if this bad information is included on your credit report for up to seven years. This includes students who would want to do refinancing.
Increased APR: As punishment for paying less than the minimum or late payments, some credit card companies may raise your APR (Annual Percentage Rate) if you are regularly paying less than the minimum amount due. As a result, your interest payments will increase, which will make it increasingly harder for you to pay off your credit card debt.
Calls from debt collectors: Your credit card company may start calling and writing to you about your debt if you don’t pay the minimum amount due on time or if you keep paying less than the minimum amount. These letters and calls can be upsetting, and if you keep skipping payments, they might potentially lead to legal action.
What to do when you cannot meet the minimum payment
If you can’t afford the minimum payment, the first step is to contact the lender. Let them know what the situation is and see if they can help.
Many lenders offer short-term hardship relief programs that can potentially lower your minimum payment which allows you to be paying less by a set number of months.
However, you should keep in mind that these programs are only designed to prevent late payments on your bills. You won’t make much progress on paying off your debt while you’re in the hardship program.
Continued failure to meet your minimum payments could indicate budget problems, bad spending habits, or simply too much debt to manage properly.
A certified loan counselor can help you better understand why you’re struggling and offer several potential solutions to help stabilize your finances.
Whatever you do, don’t keep making short payments. If you haven’t reached a new agreement with your lender, consistently making sub-minimum payments will eventually result in a default on the account, which will likely result in a collection of funds from the account. The sooner you solve the problem, the better.