The Minimum Credit Card Payment Trap

Paying just the minimum credit card payment each month may be tempting if you are on a really tight budget. But as these facts on credit card debt point out, it can take years to pay off your balance if you make it a habit.

Credit Card Debts Can Bleed You Dry If You Only Pay the Minimum

Most new credit card holders start out with the best intentions. They have probably heard the standard advice that you should not borrow more than you can afford to pay back. However, when that first bill arrives and they see the amazingly low minimum payment due, they are elated by how affordable it really is.

The typical response is to get more stuff! Even when their available credit is maxed out, the minimum payment is still very affordable. This can be deceiving, and unless you understand how compounded interest works and why your minimum payment is so low, you may be in for a big surprise.

The Effect of only Making the minimum payment

Fast forward several months of paying the minimum payment due on a maxed out credit card and you will find that the principal balance on the card has decreased very little, if even at all. This is because the minimum amount due really only covers the interest accumulated on your total balance over the last billing period.

This basically means that for several months all the money you have sent to your credit card company did very little in the way of paying off the balance on your credit card. Simply put, you have been paying for nothing that benefits you. Rather, you have been paying the credit card company for the privilege of using their money all those months ago, over and over again.

Why Paying More Than The Minimum Makes Sense

The best way to avoid this scenario is to pay more than the minimum amount due each month. In fact you should consider paying twice the amount due. This way you will be paying the interest accumulated last period, as well as paying down your principal balance. I realize this can be difficult, especially if you are dealing with multiple credit card payments each month.

The best type of motivation is simple, do the math. Find a credit card interest calculator, plug in you principal balance, your interest rate and how the minimum payment is calculated and view the results.

I did this and found that on a $1000 balance with a very modest 10% interest rate it would take almost 8 years to pay off the balance. This would result in my paying $428 of interest all together. That's close to half of the entire balance. At the time of this writing the average interest rate on a credit card is a whopping 16%, which by the same calculation would take 9 years resulting in $792 of interest paid overall which is over three-quarters the original balance. 

Of course I don't know many people who only have $1000 on their credit cards. $10,000 is more realistic. By paying only the minimum amount due (calculated at interest + 1% of the balance) on a ten thousand dollar principal balance with a 16% interest rate, it would take you over 28 years and $12,792 in interest alone to pay off. Overall, you would have paid $22,792 on that $10,000 balance (if you don't continue to use the card).

By paying a set amount each month of $468 (roughly double the initial minimum amount due) on the above ten thousand principal balance, 28 years of payments is reduced to 2.16 years and $12,792 of interest paid is reduced to $1849. Even if you reduce the amount you pay each month to $300, it reduces the overall amount paid to $13,314 (as compared to $22,792). That is significant.

Article by Norman Sheppard

As you can see, paying only the minimum credit card payment each month is not the best way to get out of debt. For ideas on how to pay off your credit card debts faster, read the following articles:

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