Credit Card Minimum Payments

Making the minimum monthly payments on your credit card balance seems like the smart option, after all, why pay more than you have to to the credit card companies? Unfortunately this line of thinking is very irrational and will cause you to fall into a debt trap. Credit card debt is one of the worst types of debt to have, not only will you see your credit score drop significantly, you will likely end up paying more to credit card companies in interest than you will in the actual principle of your balance.

Credit card companies require their cardholders to make minimum payments on their balance each and every month. What the minimum payment has to be depends on your balance but it will generally be between 1 and 5 percent of your balance. If you have a credit card balance of $1,000 this equates to a minimum monthly payment of between 10 and 50 dollars, if you have a balance of $5,000 this means a minimum monthly payment of between 50 and 250 dollars. It is very easy to fall into the trap of just making your minimum payments but this is something you must avoid to thrive financially.

Let’s go over a pretend scenario to show how important it is to make more than the required minimum monthly payment on your credit card balance. Jane has a 5,000 dollar balance on her credit card; unfortunately this is a very realistic scenario as a large segment of the US has more than 10,000 dollars’ worth of credit card debt! In fact, the average amount of debt a household with credit card debt has is $14,750! Jane makes her required 2% minimum payment each month. This comes out to $100 a month which is all she thinks she can afford to pay. If Jane makes 100 dollars a month in payments it will take her 94 months or almost 8 years to get rid of her credit card debt. She will end up paying over 4,000 dollars’ worth of interest to the credit card companies over these 8 years; remember that her balance was just 5,000 dollars to start with! This is assuming that Jane’s credit card company is charging her with an 18% APR on her purchases and balance, which is about average.

Now let’s pretend that Jane used a little foresight and realized how important it is to make more than the required minimum monthly payment. Jane cannot afford to pay off all of her 5,000 dollar balance at once, but she did make room in her budget for 300 dollar monthly payments instead of just the 100 dollar minimum. Making just 200 dollars more in payments each month allowed Jane to pay off her credit card balance in full in 20 months versus 94! Instead of paying over 4,000 dollars in interest Jane is paying just 800 dollars! As you can see when dealing with compound interest and credit card balances a little bit goes a long way!

While it would be great to advise everyone with credit card debt to pay off their balance in full immediately that is not a viable option for most. People do not have thousands of dollars lying around, I know that I do not. It is very important however to make more than the minimum monthly payment your credit card company requires you to make. The two paragraphs above showed that Jane saved over 3,000 dollars and ended up paying off her balance 74 months quicker just by making 300 dollar monthly payments instead of 100 dollar payments. You can find a way to scrounge up a few hundred dollars in your monthly budget to devote towards your credit card payments. We are just talking about 5 to 10 extra dollars a day, eat in instead of dining out, buy things used instead of new, skip Starbucks until you have your credit card debt paid off… Do whatever it takes to avoid making the minimum required monthly payment on your credit card.

It is simply too easy to make the minimum monthly payment on your credit card balance, which is why so many people do just that. It takes discipline and foresight to voluntarily pay more to credit card companies each month than you have to but it will be worth it in the end when you are done with your credit card debt in a few years instead of a decade. If you do not have a monthly budget already make one and put paying off your credit card debt as one of your top priorities.