Money Management

Think you’re OK to only make your minimum credit card payments? Read on to find out why you’d be wrong. 

Sometimes people have no choice but to rack up a balance on a credit card and pay it off over time, rather than in one fell swoop. Maybe you had an unexpected car or home repair you had to charge in the absence of having enough cash in your emergency fund to cover it.

You may, for a period, only be in a position to make your minimum credit card payments. And that’s understandable. If you’re paying off an unexpected bill, it’s not as if you really had time to prepare.

But while it’s one thing to only make your minimum payments on your credit cards for a period, it’s another thing to pretty much always uphold that practice. Doing so could hurt you in more ways than one.

You might end up paying a boatload of interest

Credit card companies are in the business of making money on interest. So they’re perfectly OK with you making only your minimum payments because that will simply prolong the life of your balance and allow more interest to accrue against it.

You, however, should not be OK with that. If you only make your minimum payments, you’re basically signing up to lose money to interest.

Let’s say you owe $3,000 on a credit card charging 18% interest. If you only make your minimum monthly payment of $90, it will take you 166 months, or close to 14 years, to get rid of that debt. During that time, you’ll also end up accruing about $2,700 in interest, which is pretty darn close to the original amount you charged on your card in the first place.

You might cause damage to your credit score

Multiple factors go into calculating your credit score, and the two that carry the most weight are your payment history and your credit utilization. The former speaks to how timely you are with your bills, and the latter speaks to how much of your available credit you’re using at once.

Making your minimum monthly payments will mean you’re current on your bills, so that’s a good thing for your payment history. But if you continue to let interest accrue on your credit card balance, it will grow, thereby leading to a higher level of credit utilization.

The result? Your credit score could take a hit. And once that happens, you might have to settle for a less favorable interest rate the next time you need to sign a personal loan.

Don’t stick to only paying those minimums

It’s easy enough to fall into a pattern of only making your minimum payments on your credit cards. But as you can see, doing so could really mess you up financially, and you don’t deserve that.

Instead, one thing you may want to do is comb through your expenses and identify a few small ones to cut. Take that extra money and apply it to your credit card balance, so you’re paying more than your minimum payment every month.

At the same time, consider looking to the gig economy to drum up extra cash. You don’t have to commit to a side job indefinitely — just long enough to make good headway on your balance.

Remember, only making your minimum payments is a good way to ensure that your debt lingers longer. If that’s not appealing, then take steps to chip away at your balance faster.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Being your own boss comes with plenty of perks, including financial. Here are some of the most important benefits of being a gig worker. 

There was a time when being a gig worker felt like an option of last resort. Maybe someone lost their job or took on a gig as a side hustle. For some, gig work may still start out as a move of desperation, but for many, it’s a way of life, and an ideal way to own a small business.

Being one of the estimated 73.3 million gig workers in the U.S. offers freedom and some pretty sweet financial benefits that are hard to deny. Here are five benefits of being a long-term gig worker.

1. Can cut down on travel expenses

Unless your gig finds you on the road a lot — like working for a courier, babysitting, or as a handyperson — there’s a good chance you don’t have a commute. For example, if you’re working as a proofreader, graphic designer, or online tutor, the amount of time you spend in your vehicle may be greatly reduced.

After extensive data mining, Clover Real Estate found that the average commuter in the U.S. spends just shy of $8,500 annually on their commute. Depending on the job and how often your side gig takes you out on the road, working from a home office can save you a substantial amount of money.

2. Frees up time to earn money

Another thing Clover Real Estate’s research found is that the average commuter in the U.S. loses 32 hours a year to traffic. Let’s say you work as a freelance editor for $50 per hour. An extra 32 hours a year will bring in an extra $1,600.

3. Could reduce clothing budget

Depending on the type of job you had before going out on your own, it’s possible you’ll save money in the clothing department as well. Consider this: No one knows if you’re wearing pajama bottoms when you’re in a Zoom meeting or working as an online tutor. If you’ve started an answering service, all people hear when you pick up the phone is your professional voice.

The average American spends approximately $161 per month on clothing. Reducing how “dressed up” you need to be for a public-facing job can lead to a smaller clothing budget and may make you less likely to depend on credit cards to buy new clothes when you need them.

4. Ability to scale income

Working a traditional job typically means knowing precisely how much you will earn in any given year, minus commissions or bonuses. When you’re a gig worker, you can decide if you want to take on more work and, therefore, earn more money. You can decide if you’re going to push it hard nine months of the year so you can enjoy a lighter schedule the other three months. It’s up to you.

Let’s say you’re a gig worker and receive a surprisingly high tax bill. Rather than stress, you can increase your workload long enough to put what you need in the bank to cover the added expense.

5. Access to supercharged retirement savings

If you’ve been working traditional jobs for years, you likely know the benefits of employer-sponsored retirement plans. But did you know that if you’re a self-employed gig worker, you can open a Solo 401(k) plan? What makes a solo plan so attractive is that you — as both the company owner and employee — can maximize the amount of money you invest for retirement each year.

Including $7,500 in catch-up funds, an employee contributing to a company-sponsored 401(k) can contribute a total of $30,000 annually. However, that same over-50 employee can contribute up to $73,500 to a Solo 401(k), depending on how much they earn each year. The more you earn, the more you can contribute. What’s more, you can even hire your spouse to work for your small business, and as long as they’re earning money, the business can make contributions on their behalf.

Starting your own business as a gig worker can be scary, especially if you’ve never done it before. But then again, most worthwhile things in life have an element of “scary” built in. It’s up to you to determine if the financial benefits and potential life balance make the risks worth it.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More