The minimum-payment trap: 22 years to clear $5,000
Credit card statements show a minimum payment. Paying it keeps your account in good standing. It also keeps you in debt for a very long time.
The example
A $5,000 balance at 20.99% interest, no new purchases, with a minimum payment of 3% of the balance or $10, whichever is greater:
| Strategy | Time to pay off | Interest paid |
|---|---|---|
| Minimum payment only | about 22 years | about $6,700 |
| Fixed $200 a month | 34 months | about $1,630 |
The minimum shrinks as the balance shrinks, so your payments fall almost as fast as the debt. Most of each early payment goes to interest. A fixed payment keeps the same dollars working, and more of each payment goes to principal every month.
What to do
- Pick a fixed monthly amount and automate it, rather than paying whatever the statement suggests.
- Pay the highest-rate debt first if you have several balances.
- Look at a lower rate. A balance transfer or a low-rate card or line of credit can cut the interest sharply. Watch for transfer fees and promotional periods ending.
- Pay the debt before investing heavily. Paying off a 21% card is a guaranteed 21% return. Few investments come close.
Calculated with monthly compounding, minimum = greater of 3% of the balance or $10, and no new charges. Card terms vary. Education only, not financial, tax or investment advice. Numbers are illustrative; check your own situation, or speak with a licensed professional.