Credit card companies allow people to make smaller monthly payments instead of paying off the entire balance. Doing so means your accounts can stay in good standing and avoid missed payments.
While paying the monthly minimum may seem like a good decision on the outside, it allows interest to quickly accumulate on your outstanding balance. Although this minimum keeps your money free from other expenses, the burden of debt can become overwhelming if the minimum monthly payment becomes your default option.
Why this advice is so important when you retire
It makes sense for most credit card users to try to pay off their credit card balance in full, but it’s especially important for retirees to follow this advice. Paying off your credit card balance prevents interest from accruing, and credit cards typically have annual percentage rates (APRs) ranging from 20% to 30%.
Retirees – who have left their jobs for good and are likely living on a fixed income – may have fewer opportunities to turn things around if they hit a financial hole. Not having a regular check can make it more difficult to keep up with living expenses and deal with mounting interest-induced debt. Social Security can help, but if your interest on your balance continues to freeze, it probably won’t be enough.
Every dollar that goes to interest is another dollar that you can’t spend on emergency expenses or health care, which are rising costs that many retirees face. People save and invest for decades to have decent nest eggs, but letting debt get out of control can derail those efforts. People who have only made a minimum payment for a few months may want to consider a part-time job or hustle to speed up debt settlement.
What should retirees do?
Making more than the minimum monthly payment is a solid start, even if you pay a few dollars more. Retirees with fixed incomes and limited nest eggs may not have the resources to pay off all the debt in one month, but paying as much as possible on your balance while paying your living expenses can make a big difference.
If possible, you should stop adding new charges to your card. Review your monthly budget and cut back where possible. You can cancel the monthly subscription and use free services like the entertainment library, for example. Downsizing can also help you save.
Retirees with good credit may want to consider a balance transfer. Transferring credit from one credit card to another will result in fees ranging from 3% to 5% of the balance. However, you can end up with 0% APR for up to two years, making it easier to pay off the loan. Just make sure you pay off the entire loan before the 0% APR promotion expires.
Taking on a temporary clutter or selling things around the house that you no longer use can give you extra cash that can go towards paying down debt. It also makes sense to take stock of how your needs have changed. For example, some retired couples no longer need two cars and may choose to sell one of the cars. That sale will also reduce insurance and maintenance costs.
