Are you only making the minimum monthly payments toward your debt? Let’s look at a couple of the Myths of the Minimum Payment that might motivate you to do at least a little bit more! We’ll discuss in the comments below.
Myth #1– You will never pay off your debt if you pay just the minimum monthly payment.
This used to be true. Credit card companies used to charge such low minimum monthly payments that the payment wouldn’t even cover the interest. None of the payment went to principal, so the credit card debt would continue to grow, even if nothing else was charged to the card. It’s called negative amortization and it was bad news for consumers before 2003.
In 2003 legislation was passed requiring the minimum payment to cover fees and interest and allow some of the payment to go toward principal. If you have credit card debt, you will eventually pay of your debt off by making the minimum payment, but it will take years longer and cost you much more in interest.
Here’s a simple example:
$10,000 in credit card— 12% interest— 2% minimum payment (pretty much standard)
A– If you pay the minimum 2% of the balance (starts at $200/month, but goes down each month as the balance goes down), it will take 424 months (35 years) to pay off your debt of $10,000. You will pay over $15,000 in interest alone!
B– On the other hand, if you pay a fixed payment of $300/month, it will take you 44 months (under 4 years) to pay off your debt of $10,000. You will pay just over $3,000 in interest.
As a side note, if you take the starting minimum payment of $200 in example A, and keep that $200 as a fixed payment, you will get done in 6.5 years, which is still amazingly better than the bleak 35 years of minimum payments.
While the myth “You will never pay off your debt if you pay just the minimum monthly payment” is technically not true, it really depends on your interpretation of the word “never.” Sometimes “a long time” (like 35 years!) may as well be “never.”
If you haven’t run the numbers on your debts, play around with a credit card calculatorto see the difference that paying more than the minimum payment can make. You might have to check an old statement to see what the minimum payment percentage is (or just use 2%). We can discuss details on your findings in the comments.
Are convinced that paying more than the minimum is a must? That leads us into myth number 2.
Myth #2– You can’t afford to pay more than the minimum payment.
Maybe your current budget allows only enough money for minimum payments, but that doesn’t mean you can’t afford more. Knowing that paying only the minimum due will likely cost you thousands in interest and take many years longer to pay off, you really can’t afford not to free up some money to increase your monthly payment.
Ideas to free up some money in the monthly budget to put toward debt:
- Get rid of cable
- Downgrade your phone plan (we geta refund each month for unused data)
- Cut the grocery budget (with these real food meal plans you’ll spend $350/month
- Stop eating out
- Pack your lunch
- Ask about having your bills lowered
- Dress for the weather and adjust the thermostat
- Skip the morning coffee and afternoon co*ke (drink water instead)
- Sell your car and buy a used one
The list could go on and on. Get creative. Make sacrifices.
“Finding” money in your monthly budget by reducing expenses is a gift that keeps on giving. Sure, you can find something to sell on ebay and get a one-time $60, but if you pull the plug on cable you will have an extra $60 (likely more) every month.
If you still have plumbing problems(i.e. you are spending more than you make) then your debt is still growing. You will have to free up enough in the budget to cover your expenses before you can find extra to increase your monthly payment to creditors.
If you are stumped about where to start and how to reduce your expenses, check out . You’ll find practical, effective challenges that will help you reduce your normal expenses, organized in a way that’s motivating and makes sense!
Don’t let these myths or their debunking discourage you. Knowledge is power! Let it encourage you. You can do this!
It’s Your Turn!
- Do you routinely pay more than the minimum payment on your debt?
- What ways have you been able to pay more than the minimum payment?
- Have you run the numbers on your debts to see the difference paying extra would make?
FAQs
Interest charges add up: Typically, credit companies will charge you high interest rates on unpaid balances. If you only pay the minimum each month, the interest charges can snowball. The additional interest and any other fees are added on to your balance and can increase a lot over time.
What is the minimum payment on a $3,000 credit card? ›
Minimum Payment on a $3,000 Credit Card Balance by Issuer
| Issuer | Standard Minimum Payment |
|---|
| Capital One | $30 |
| Chase | $35 |
| Citibank | $45 |
| Credit One | $150 |
6 more rowsOct 19, 2021
Apply the percentage to your current credit card balance and then add your fees and past-due amounts. First, you'll owe 2% on the balance of $5,000, then you'll add $120 past due and $80 in late fees. That would make your minimum payment $300.
Why is it more challenging to get out of debt when only paying the minimum payment? ›
While making only the minimum payment on your credit card may make your budget more manageable each month, it could lead to more debt over time. While you're making minimum payments, the interest on the unpaid balance continues to grow, making it harder to pay off your debt.
Should you only pay the minimum payment? ›
Offering only the minimum payment keeps you in debt longer and racks up interest charges. It can also put your credit score at risk.
Is there an advantage to paying more than the minimum payment? ›
By making a larger monthly payment, more money goes toward the principal balance, which is what your interest is calculated on. Every dollar paid over the minimum reduces your original debt and the interest charged on that debt.
How long will it take to pay off $20,000 in credit card debt? ›
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
Is $25,000 a high credit card limit? ›
Yes, $25,000 is a high credit card limit. Generally, a high credit card limit is considered to be $5,000 or more, and you will likely need good or excellent credit, along with a solid income, to get a limit of $25,000 or higher.
What is the minimum payment on a $7000 credit card? ›
Example: Your card issuer requires you to pay 3% of your outstanding loan balance. You owe $7,000 on your credit card. The minimum payment is 3% of $7,000, or $210.
What is the minimum payment on a $2000 credit card? ›
Minimum Payment on a $2,000 Credit Card Balance by Issuer
| Issuer | Standard Minimum Payment |
|---|
| Capital One | $25 |
| Chase | $35 |
| Citibank | $30 |
| Credit One | $100 |
6 more rowsOct 19, 2021
If you only make minimum payments, a $10,000 credit card balance will cost you $16,056.59 in interest and take 346 months to pay off. Minimum payments on a $10,000 balance would start at $267 and decrease as you paid down what you owe.
Why are Amex minimum payments so high? ›
The American Express minimum payment is the highest of: The interest charged on your statement, plus 1% of your new balance (excluding any overlimit amount, penalty fees, interest charges, or other plan balances).
How much credit card debt does the average American carry today? ›
What is the average credit card debt? The average American household owes $7,951 in credit card debt a year, according to 2022 data from the Federal Reserve Bank of New York and the U.S. Census Bureau.
What is the biggest problem with just making the minimum payment on a credit card? ›
Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.
Should I pay off my credit card in full or leave a small balance? ›
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
Why is minimum payment negative? ›
Typically, this happens when you've overpaid your outstanding balance or if you've had a credit returned to your account. A common example is if you make a purchase with the card and later return the item, where you then are issued a credit back to your account.
What is the problem with paying only your minimum credit card balance each month in EverFi? ›
Option a: One problem with the minimum payment towards the credit card balance every month is experiencing a lesser credit score. A lower monthly payment increases the utilization of credit ratio, which finally results in a lower credit score. The credit score is inversely related to the utilization of credit ratio.
What happens if you only pay minimum on credit card? ›
Risk of paying only the minimum due amount
Credit cards apply interest on your outstanding balance every month. So if you pay only the minimum amount, your outstanding balance will remain high. The interest on the outstanding balance will accumulate month on month, making your debts higher.
Why do you want to not only pay the minimum amount each month on a credit card? ›
You'll incur less interest
The exact calculation varies by issuer, but with any card, if you pay only the minimum every month, you won't really reduce your outstanding debt that much. You'll just be rolling it over, month after month, racking up interest on the whole amount.
