Credit Card Minimum Payments Are More Dangerous Than You Think

credit card minimum payment

Sending in just your minimum credit card payment is the worst thing you can do for your debt — other than not paying it at all. Minimum payments are designed to keep you in debt as long as possible, even when paying off small amounts of debt. So even though you think you’re chipping away at your balance, often you’re not.

I learned this the hard way when I had to pay off a credit card. I would pay the minimum and sometimes a little extra, but every time I looked at my balance, it remained virtually unchanged. It wasn’t until I got off the minimum payments cycle that I started to make headway on paying it all off.

Here’s what I learned about credit card minimum payments.

Credit card minimum payments: An endless loop

First of all, don’t feel bad if you’ve been paying nothing more than the minimum. The National Bureau of Economic Research did an extensive survey of U.S. credit card debt and found that 29 percent of account holders were doing just that.

The New York Times highlighted a significant finding from the study — those who could pay more often didn’t. Instead, they were “highly sensitive” to the minimum due. In other words, many followed directions rather than analyzing whether they should pay more.

This can be costly. Here’s why.

In this example, we’ll use the current average interest rate (13.61%) and credit card debt amount per cardholder in the U.S. ($4,061). If you had a minimum payment of 2 percent, your monthly minimum due would be $81.22. If you only paid that every month, it would take more than 22 years to pay off the card. And the amount paid in total would be a whopping $8,761.60.

credit card minimum payment

But what if you doubled your monthly credit card payment? It would be a potentially still-manageable $162.44. And that would reduce your repayment time to just over nine years, with a total balance of $5,588.23.

credit card minimum payment

By doubling the payment, you can shave 13 years off the debt repayment and save almost $3,200 on the total balance.

How to find room to pay more than the minimum due

The question for some might not be why you should increase the amount paid on a credit card, but how to increase the amount paid. If that’s the case for you, here are a few things you might want to try.

1. Reduce your credit card interest rate

The best way to gain traction on your repayment is to reduce your credit card interest rate. Believe it or not, one way to do this is to call your credit card company and ask them to reduce your rate. If you have a positive history with them, they might be willing to accommodate you.

If you do get a lower rate, a larger portion of your monthly credit card payment will go toward the principal balance — but you’ll still want to pay more than the minimum.

2. Consolidate or refinance your credit card debt

Another way to lower your interest rate is to consolidate or refinance your credit card debt with a balance transfer credit card or a personal loan. These are products that can pay off your credit card (or cards) and help you snag a lower interest rate.

Again, lowering the interest rate can sometimes lower your monthly payments, but more importantly, it can help more of your money go toward the balance.

3. Redo (or start) a monthly budget

If you’ve never created a budget, now’s the time to start. And if you already have one, redoing it can sometimes do wonders.

You might find there’s room for flexibility or things you’re just not interested in continuing to pay for. It also helps to realize that you don’t always have to cut items from your budget. Just reducing the frequency of those items can make a big difference.

Then apply any extra money you find to add more to your credit card payments.

You can beat the credit card minimum payments game

Once you understand how little paying the minimum does for your debt payoff strategy, you have the opportunity to do something about it. Whether it’s refinancing your debt, configuring a new budget, or even finding a way to earn extra money to help with your payments, there are many things you can do to make an impact on your debt.

As long as you don’t succumb to a debt repayment that’s too long and expensive because of minimum payments, then you can win the credit card game and reach debt freedom.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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