The Minimum Payment Trap: 18 Years to Pay Off a $6,000 Card
The minimum payment on a credit card statement looks like a favor. It is the smallest amount that keeps the account in good standing, and it is usually small enough to fit any budget. It is also the most expensive way to pay off a card.
What "only the minimum" costs
Take a $6,000 balance at 22% APR, with no new purchases. A common minimum-payment formula is 1% of the balance plus that month's interest, with a $35 floor.
- First minimum payment: $170
- Time to pay off: 215 months, or about 17.9 years
- Interest paid: $9,506
- Total paid for a $6,000 balance: $15,506
You pay back more in interest than you borrowed.
Why it takes so long
The minimum is tied to the balance, so it falls as the balance falls. In the first month, $110 of the $170 payment is interest and only $60 reduces what you owe. Next month the balance is slightly lower, so the minimum is slightly lower too, and again only about 1% of the balance is paid down.
A payment that shrinks along with the debt never builds momentum. Each month you clear about 1% of what is left, which is why the last few thousand dollars take years.
A fixed payment changes everything
Keep paying the same dollar amount every month instead of following the minimum down, and the picture is very different:
| Fixed monthly payment | Paid off in | Total interest | Saved vs minimum only |
|---|---|---|---|
| $200 | 44 months (3.7 years) | $2,791 | $6,716 |
| $250 | 32 months (2.7 years) | $1,979 | $7,527 |
| $300 | 26 months (2.2 years) | $1,543 | $7,964 |
| $400 | 18 months (1.5 years) | $1,081 | $8,425 |
The first minimum payment in this example is $170. Holding the payment at $200 a month, only a little more, and never letting it drop cuts the payoff from 17.9 years to under 4 and saves $6,716 in interest. You do not need a much bigger budget than you had in month one; you need to stop the payment from falling.
How to get out of the trap
- Find the real numbers on your statement. Card statements in the US include a minimum payment warning that shows how long payoff takes at the minimum, and what payment would clear the balance in three years.
- Set a fixed automatic payment above the minimum, and leave it there as the balance falls.
- Stop adding to the card you are paying down, or the math above no longer holds.
- Send extra money to the highest-APR card first if you have more than one, while paying at least the minimum on the others.
- Ask for a lower rate or look at a balance transfer, counting any transfer fee in the comparison.
Your card may differ
Issuers use different formulas. Some charge a flat percentage of the balance, such as 2%, others use 1% plus interest and fees, and the floor varies. The cardholder agreement spells out yours. The calculator below lets you change both the percentage and the floor, and shows the minimum-only path next to your own plan.
Sources
This article is general information, not tax, legal or financial advice. See our disclaimer.