The Cost of Paying Off Debt With Minimum Payments

A stack of credit cards
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Perhaps one of the most flexible things about having a credit card is the ability to make a minimum payment toward your balance each month rather than having to pay your balance in full.

The minimum payment is the lowest amount you can pay on your credit card balance and avoid a late payment penalty. As long as you pay the minimum by the due date, your account remains in good standing.

While the minimum payment is the easiest payment to make because it's so low, paying only the minimum month after month is the the slowest way to pay off your credit card balance. It could take years, decades in some cases, to pay off the balance. Not only that, you could end up spending hundreds, possibly even thousands, in interest by the time the balance is repaid.

How Payments Are Calculated

Your credit card agreement will describe how your minimum payment is calculated. It may be different for each of your credit cards.

Typically, minimum payments are calculated as a percentage (something like 1-3%) of your credit card balance plus any penalty fees you've been charged. For example, if you miss a payment, the late payment fee is added to your minimum payment and must be paid to bring your account current again.

You don't have to try to calculate your minimum payment on your own. Your current minimum payment and the payment due date will be listed on your credit card billing statement each month.

Minimum Payment, Maximum Cost

To see the impact of paying off a credit card with minimum payments only, consider a credit card balance of $5,000, at the current average APR of 21.21% (as of January 2020), and minimum payment as 2% of your credit card balance. Making minimum payments only, it would take you over 30 years and $21,643.83 in finance charges to pay off this debt. That doesn't include any fees you might pay over the life of the credit card balance.

Increasing your payments to $125 a month would allow you to pay off the same debt in less than 6 years and spend only $3,770 in interest. Of course, the more you pay toward your debt, the faster you can pay it off and the more you'll save in interest.

Not only does increasing your payments allow you to pay off the balance sooner, you also save money in interest. In our example, you'd save almost $18,000 just by increasing your payment and keeping it at the same level until your balance is completely repaid.

Minimum payments are typically calculated as a percentage of your outstanding balance. One of the reasons that it takes longer to pay off your balance with minimum payments is because your minimum payment goes down each month as your credit card balance goes down. The lower payment means less of your balance is paid off each month.

Carrying around credit card debt for multiple years can put a strain on your finances and make it more difficult to achieve your other financial goals. For example, paying off credit card debt slowly could raise a red flag with mortgage lenders, who consider how much of your monthly income is going toward debt payments.

Minimum Payment Timeline

Federal law requires that your credit card billing statement include the amount of time it will take you to pay off your credit card if you make only the minimum payment. Check a recent copy to see the timeline for your credit card based on your current balance and interest rate. You may be surprised to see the number of years it will take to pay off your balance if you make the easier minimum payment.

Along with the minimum payment disclosure, your billing statement will outline the monthly payment you should make to pay off your balance in three years. If you're motivated to pay off your debt quickly, this amount is a good guideline for what it takes.

You can also use a credit card payoff calculator to calculate the time it will take to pay off your credit card with minimum payments. A payoff calculator will also show you the amount of interest you will pay when you make only the minimum payment and let you see how increasing your payment will help you pay off your balance sooner.

Article Sources

  1. Discover Credit Card Resource Center. "What is a Credit Card Minimum Payment?" Accessed Jan. 31, 2020.

  2. Capital One. "Here's What You Should Know About Late Credit Card Payments." Accessed Jan. 31, 2020.

  3. Bank of America. "How Mortgages Are Approved." Accessed Jan. 31, 2020.

  4. Consumer Financial Protection Bureau. "Truth In Lending Act - 12 CFR § 1026.7 Periodic Statement." Accessed Jan. 31, 2020.