Being debt free is one of the most important things to improve your financial life. So, you need to focus on paying all of your major debts in full like - home loan, car loan, medical bills, and particularly credit card debts.
But, there are few instances where it is wise enough to pay only the minimum balances on your credit card. It is because the minimum payments can be a short term solution to your other financial issues.
Have a look at them:
1. You don’t have savings for emergencies
You must have some savings to meet emergency expenses. Generally, you need to save 3 to 4 months’ expenses or least $500 in your account for the emergency purpose. To maintain that amount, it is fairly acceptable that you make only the minimum payment on credit cards.
Without having that fund, you’ll be thinking about using your cards more, if you need money for sudden home repair jobs. Maintaining sufficient emergency fund can also help you to build money saving habits.
But, once you reach your minimum saving amount ($500 or more), try to jump back on your full payments again.
2. You have a fixed hardship coming your way
Sometimes we can predict bad situations that are coming our way. As a result, we make arrangements for the hardships we’ll face in the future.
For example - If you feel that you might lose your job due to some social (divorce issues) or economic (inflation) problems, then you need to save money for upcoming financial crunch. For that, you can make minimum payments and save the extra for the future.
So, it’s good if you lower your monthly credit card debt payments and gather money to repair your old car if it gives you signs of breakdown. Once the expense or hardship has passed, turn back to your regular full payments on your credit card balances.
3. You are behind on child support payments or owe the IRS
If you ignore your tax payments, you’ll definitely face some financial consequences in form of extra interest and penalties.
For example - If you fail to make payments to the IRS, your wages will be garnished, you’ll have a tax lien on your properties, and you might spend few days in prison.
Similarly, as a parent, you must pay your child support regularly to avoid penalties such as passport denial, having income withheld, or suspension of your driving license.
So, in both the above-mentioned cases, it is worth to pay the minimum balances towards your credit card bills and put the extra money towards IRS and child support.
4. You have medical bills to pay off
As per the latest survey (2016) by The Henry J. Kaiser Family Foundation and the New York Times, on an average, 20% working people have health insurance and the rest uninsured people have issues regarding medical bill debts. The survey also reveals that people are spending much more towards medical expenses than they did in the last few decades.
So, to keep that cost under control, you need to free up a decent amount of money every month. To gather that amount, it’s considerable to pay a minimum balance on your credit card. But don’t forget to roll back to your regular payments when the crisis ends.
5. A peculiar debt causing depression
Sometimes a particular debt may trigger emotional distress.
For example – Money borrowed from a close friend or a credit card debt where a collection agent is bothering you daily.
So, in these cases, psychological reasons are way bigger than financial reasons. If paying back the entire debt amount to your loved ones give you mental relief, that’ll be the primary thing you need to do first. It is something that can give you a peaceful sleep at night. After paying off those debts, you may roll back again to your regular payment schedule.
6. You have other huge debt payments queued up
It is wise to pay the minimum balance on your credit card when it has a low interest rate. Instead of paying credit cards in full, you can engage that money to pay off other huge debts like a car loan or home loan. It’s quite logical to reduce the high-interest debts rather than your nominal credit card bills. This situation also happens when a credit card company offers 0% APR introductory rate.
But don’t forget, this might be a temporary situation. Your credit card interest rates might become high again. Once it happens, start making more payment than the minimum.
7. Lucrative investment opportunities
In your entire life span, you may encounter this situation often. You may find good investment opportunity with a good return that will compensate your credit card interest.
So, it is acceptable to reduce your credit card payment and allocate the money to gain more profit. However, it is tough to find a risk-free investment that’ll generate such an attractive return.
Read more: How to manage your credit cards in 2017