It's an easy trap to fall into: you get that pre-approved credit card offer in the mail, most likely with an appealing introductory interest rate for the first six months. You feel like you deserve a little extra spending money, and the minimum payment is only 2% of the balance; even you can afford that! You promise yourself that you'll start making more than the minimum payment after the introductory rate expires, and by then you might even get that raise you've been expecting from work. However, we all know these plans never turn out quite like you expected. A family member falls ill, and you have to take an unusual amount of time off of work, meaning you won't be getting that raise any time soon. Then when the car breaks down, you have to use any extra spending money you have to repair it just so you can get to and from your job. You can still afford the minimum payment on your credit card, though, and you decide to just stick with paying that. After all, what difference could it make?
The truth of the matter is that it can make an enormous difference. The minimum payment is the perfect amount to ensure you will be paying on your balance for years and years to come. In the end, you could be paying several times more than your original balance in interest charges alone. It may not seem plausible, but it's hard to ignore when you have the numbers right in front of you. Here are two examples of what happens when you make only the minimum payment on your credit card:
Let's say you have an meager $1,000 balance on your credit card, which has the average interest rate of 18%. Your minimum payment is $20 per month. If you pay the minimum payment, you will be paying off this balance for eight years, and you will pay more than $850 in interest charges.
However, most people have far more than $1,000 in credit card debt. Let's try the more realistic balance of $5,000. Paying the minimum payment on this balance with an interest rate of 18% will result in a total payoff in approximately 35 years. In that time, you will have paid almost $13,000 in interest charges alone.
These numbers can be frightening, but there is something you can do. You don't have to pay much more than the minimum to start seeing big changes in your balance. Let's try these numbers again, this time paying slightly more than the minimum payment.
On the $1,000 balance at 18% interest, try paying $30 per month instead of the minimum of $20. Now you will only be paying on this balance for less than four years and you will pay less than $400 in interest charges.
On the $5,000 balance at 18% interest, bump the payment up to $125 per month. At this rate, you will pay off your balance in about five years, and you will pay approximately $2,500 in interest charges. You could save over $10,000!
As you can see, paying the minimum payment might seem more affordable at first, but in the long run, you will pay dearly for it in interest charges. Just increasing your payment by a little will make a big difference. The more you increase your payment, the less time and money you will spend trying to pay off your credit card debt. Do yourself a favor and don't fall into the trap of making minimum credit card payments.
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Johann Erickson is the owner of
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