How To Break The Minimum Payment Habit On Your Credit Card

Paying More Than the Minimum Saves You Money

Cutting credit card.

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One of the most costly mistakes you can make with credit cards is getting into the habit of only paying the minimum amount due each month. While the minimum amount may be affordable; it will also cost you more money in the long run.

How the Minimum Payment Is Calculated

To better understand why paying the minimum can be so costly it is important to learn how the minimum payment is calculated. While each card can may use a different calculation, they all use a certain percentage of the balance as a primary factor. This could be as low as the finance charges for that period plus 1% or upwards of 4-5% of the balance. Make sure you check your credit cards to determine how the payment is calculated.


For an example let’s take a look at a credit card with a balance of $1,000 that has an APR of 18%. When you break the APR down to twelve monthly periods you end up with a 1.5% finance charge per month. For this exampl,e we will also use the assumption that the card calculates the minimum payment by 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the card’s APR of 18% or 1.5% per month that means of that $25 payment only $10 is being applied to the balance while the other $15 is paying that month’s finance charge. During the next mont,h your remaining balance is now $990 so your next minimum payment would be calculated as $24.75 ($990 x 2.5%). For this payment $14.85 covers that month’s finance charge while $9.90 is applied to the balance.

As you can see above, you have made almost $50 in payments yet only reduced your balance by $19.90. If you were to continue paying only the minimum and the features of this card remained unchanged it would take 153 months or almost 13 years to pay off a $1,000 initial balance. This would result in paying $1,115.41 on just interest alone, more than the amount of the original balance!

Tips to Pay Off Your Credit Card

1. Pay more than the minimum payment every month, even if it is only a little bit extra. For example, if the minimum payment is $40, then make every effort to pay at least $50. You probably won't notice the extra ten dollars, but it will go directly to pay down your principal and increase the speed at which your debt is lowered. 

2. If you are currently paying a high APR on your credit card, consider making a balance transfer to a credit card with a low or no APR. Of course, you will want to read the fine print to find out the terms of the agreement, but if you have a credit card that you think you can pay off swiftly before the APR rises, then why not have all of your payment be applied directly to the premium and not the interest? 

3. Take inventory of the different amount of debt on each credit card. There are two schools of thought here. One is to pay off the credit card with the lowest balance first- this will get you motivated you to tackle the other debt. The other side of the coin is that you really don't want that big credit card balance to continue to grow bigger, so attack that one first. It's best if you can simultaneously pay off more than the minimum amount on each of your credit cards every month.

4. Remember that debt can spiral out of control. For this reason, it's critical to look at your total monthly spending. If there are areas in which you can cut back and use that money towards paying down your debt instead, it is imperative that you do so. It's difficult to fully enjoy life if you know that you have a lot of debt constantly hanging over your head. You may need to forego some dinners out, a gym membership, or other social activities, but it will be worth it if you can knock that debt out just as soon as possible. 

Bottom Line

It's very easy to let debt build up and before you know it, you're drowning in it. It is critical to put a plan in place that will allow you to pay down your credit cards and enjoy a life that is debt-free.