The Pain of Minimum Payments


How was Christmas?  Did you have a good holiday?  More importantly, did you make everyone else’s Christmas great?  Perhaps you did, but now you are left in the doldrums of January.  It’s rough.  All of the expenses of the holidays are now coming due as the credit card bills come in.  But, hey.  That’s the benefit of using a credit card, right?  You get time to pay that sucker off.

Uh, let’s talk about that plan.

I want to walk through a little scenario that I often use in class.

credit-cardsFirst, let’s say you’ve racked up $2,000 on your credit card.  For some, that may be a lot.  But for what our counselors see, that’s not really that much.  We see clients come in with $20,000, $30,000, and even more in credit card debt.  $2,000 can’t be that bad.

Oh, wait.  We are going to make one very big assumption.  That assumption is that you aren’t going to charge anything else to the credit card until it is paid off.  Not exactly the American way, but we’ll go with it.

Next, let’s look at the minimum payment.  A good round figure to use is 2%.  To figure your minimum payment, multiply your balance by 2%.  In our case, that gives you a minimum payment the first month of $40.  Hey, that’s not bad at all.  You can handle that no problem.  After all, it’s only like two cups of your favorite designer coffee.

Then there is the interest.  Again, for a good, average number, let’s say the APR on your card is 18%.  You very well may have a lower rate, but there are also cards that run into the 20% and 30% ranges.  Remember that APR is the ANNUAL percentage rate, so we need to divide that by 12 to get the rate for a month.  In case you don’t have a calculator handy, 18 divided by 12 is 1.5.  So your interest rate for the month is 1.5% of your debt.

“ONLY 1.5%?!?” you ask?  BUT WAIT, there’s more!!!  When we apply that rate, we come up with an interest charge of $30 for the month.

Now apply that to the bigger picture.  Making the minimum payment, you’ve sent them a mere $40.  But $30 of that is taken right off the top to pay the interest.  Total debt paid?  Only $10.

Month number two has to be better, right?  You owe less so the amount of interest goes down, but so does the minimum payment.  I won’t bore you with all of the math, but if you had worked it out, you would be paying off a total of $9.95 in debt in month two.

That’s NOT better.

So how long will it take to pay off that credit card before you can start using it again?  Want to guess?  Go ahead and take a moment to think about it.  Remember, interest AND payments will go down each month.  Probably quite a few months.  Maybe even several years?

When I used’s Credit Card Minimum Payment Calculator, The final payment on your credit card will be just over 24 YEARS down the road.  In that time, you will have paid a total of almost $6,400 to get that card paid off.

Now that’s an expensive Christmas season.

Don’t get me wrong.  I’m not anti-credit card.  Credit cards can be great when used properly.  But minimum payments are probably FAR from proper for most of us.  After all, the final payoff of that credit card will take almost as long as paying off a mortgage for your house.

So what to do?

Well, make more than minimum payments on your credit cards.  Whatever extra you can make, that extra all goes to pay off the debt, resulting in less interest charged the following month.  You may also consider looking at transferring the debt to another card or loan with a low or no interest rate.  But don’t forget about fees beyond the interest and know what will happen if you don’t get it paid off by the end of the introductory period.  It may actually be more expensive for you than leaving the debt where it is and making a focused effort to pay it off.

Second, check your credit card statement.  They are required to provide minimum payment warnings in each statement.  This will tell you exactly, according the exact terms of your card, how long it will take to pay it off using minimum payments and what the total of those payments will be.

Third, if you are overwhelmed, needing a plan, or wondering about other options, get some credit counseling.  There are many great non-profit agencies out there.  The counselors at the Center for Financial Resources help people in these situations every day and have seen it all.  All you need to do is reach out and make an appointment either online or by calling us at 605-330-2700.

Perhaps the biggest tip I can give you as to what to do is – DO SOMETHING.  Debt doesn’t just go away if we ignore it.  There are consequences for not paying and lenders are willing to use the tools at their disposal.  But by facing the debt and being proactive, you can get it paid off and be free to move forward with the rest of your life without the burden of that debt.


written by Breck Miller
Image courtesy

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