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
However, if you only make the minimum payment on your credit cards, it will take you much longer to pay off your balances—sometimes by a factor of several years—and your credit card issuers will continue to charge you interest until your balance is paid in full.
What is a six figure debt? ›
: in the hundreds of thousands : totaling 100,000 or more but less than one million.
What is the minimum payment on a $3,000 credit card? ›
The minimum payment on a $3,000 credit card balance is at least $30, plus any fees, interest, and past-due amounts, if applicable. If you were late making a payment for the previous billing period, the credit card company may also add a late fee on top of your standard minimum payment.
Do minimum payments pay off debt? ›
While you're making minimum payments, the interest on the unpaid balance continues to grow, making it harder to pay off your debt.
Are minimum payments a trap? ›
Impact of Making Only the Minimum Payment
As the saying goes, “It is a trap!” One that can keep you buried in debt and paying interest on your credit card debt – while barely touching the actual balance due month after month after month. That can occur even if you never make future charges on your credit card.
What happens if I only pay the minimum payment? ›
If you pay the credit card minimum payment, you won't have to pay a late fee. But you'll still have to pay interest on the balance you didn't pay. And credit card interest rates run high: According to November 2023 data from the Federal Reserve, the national average credit card APR was 21.47%.
How much is the average American in debt? ›
The average debt in America is $104,215 across mortgages, auto loans, student loans, and credit cards. Debt peaks between ages 40 and 49 among consumers with excellent credit scores.
What is 6 figure payment? ›
6 figures is what we say to refer to a number which is between 100,000 and 999,000. We say "6 figures" because there is 6 individual numbers within the number. Usually this term is used for describing a salary! If someone earns over $100,000 per year, we say "they earn 6 figures".
What is the new six figure income? ›
The term “six figures” refers to any annual six-digit salary that falls within the $100,000 to $999,999 range.
What is the 15 3 credit card payment rule? ›
The 15/3 rule, a trending credit card repayment method, suggests paying your credit card bill in two payments—both 15 days and 3 days before your payment due date. Proponents say it helps raise credit scores more quickly, but there's no real proof. Building credit takes time and effort.
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.
Is 25000 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.
Is it better to pay off debt quickly or slowly? ›
While the answer varies on a case-by-case basis, it's often important to strike a balance between the two. Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes.
Is 0% debt bad? ›
Having no debt isn't bad for your credit as long as there is some activity on your credit reports. You can have a great score without paying a penny of interest.
Should I double my minimum payment on my credit card? ›
If you can't pay your statement balance in full each month, Capital One suggests paying as much of the balance as possible. Paying even double the minimum amount can help significantly.
Why is it unwise to make only minimum payments? ›
While it's important to make at least the minimum payment, it's not ideal to carry a balance from month to month, because you'll rack up interest charges (unless you're benefiting from an intro 0% APR) and risk falling into debt.
Why is it important to pay more than the minimum payment? ›
By paying extra toward your credit card balances, you'll reduce the amount of interest paid on the borrowed amount and pay off your debt sooner. As an added bonus, you'll likely see your credit score improve and you'll have more available credit at your disposal.
What is the minimum payment on a $500 credit card? ›
Percentage method: Some credit card issuers calculate the minimum payment as a percentage of your outstanding balance. This percentage typically falls within the range of 1% to 3% but can vary. For example, if your outstanding balance is $500 and the minimum payment percentage is 2%, your minimum payment would be $10.
Is minimum payment illegal? ›
There is no minimum card payment law, which means that there's nothing stopping businesses from setting a minimum spending limit.
