Credit Card Minimum Payment
Stop Paying the Minimum
Credit cards are there to put you in debt and keep you in debt. When they do it, they possess one tool is more effective than all the others. It's called the credit card minimum payment.
What's a Credit Card Minimum Payment?
Your minimum payment is the absolute minimum that you must pay off each month to avoid defaulting on the debt. If you don't pay your minimum, your financial institute will come after you - but please don't make the mistake of thinking it's fine to just make your minimum payment each month.
Why are Credit Card Minimums Bad?
Credit Card Minimum payments used to be set at relatively high percentages, anywhere from 5% to 10%. This meant that you paid more, but your debt would get paid back faster.
Credit card lenders soon realised, though, that they could set the minimum payments lower, and collect a smaller amount of money each month for a much longer period of time. This would let them tell people that debts on their cards were 'affordable', while they raked in the cash over the long term, thanks to the power of compound interest.
Here's an Example.
Let's say you owed $500 at an interest rate of 12.7% per year (1.5% per month). Your minimum payment is 10% per month. Remember that your payment goes towards the interest first, and then the debt. In this example, $7.5 out of the $50 you paid would disappear as interest - but $42.5 would still go towards paying off the debt, meaning that your debt the next month would be $457.5.
What happens if you change the minimum payment to only 5%? Well, the difference is enormous. Sure, you're only paying an 'affordable' $25 - but $7.5 of it is still going on interest. That means that your $25 has only paid back $17.5 towards the debt, and you still owe $482.5!
There are so many people who just don't understand the huge difference it can make if you only ever pay the minimum payment.. For higher interest rates, it only gets worse: there are cards out there where only making the minimum payments will actually cause you to owe more each month, not less!
So What Should You Do?
First, look for a card with a high minimum payment - this is a good way to discipline yourself into paying off the debt faster.
Second, always pay more than the minimum if you can afford to. It's better to pay it now and get it over with, instead of paying it for the rest of your life?