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, you're in good standing with your credit card issuer.

While the minimum payment is the easiest payment, it’s also the slowest way to pay off your credit card balance. If you only make the minimum payment on your credit card, it could take years to pay off the balance. Not even 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. Your minimum payment could be higher if you have penalty fees, a recent history of late payments, or you're behind on your payments.

You don't have to try to calculate your minimum payment on your own. Your current minimum payment 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, with a 14% APR, and minimum payment as 2% of your credit card balance. Making minimum payments only, it would take you 22 years and $5,887 in finance charges to pay off this debt, not including any fees you incur 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 $1,775 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 more than $4,000 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.

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. 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.

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.