Minimum Payments Will Cost You

Mar 25, 2019 by

credit cardsWhat’s the most important information on your monthly credit card statement? The balance? The due date? The APR? I think it’s this:

years + months to pay off credit card balance

This is the actual disclosure from my most recent credit card statement. I’ll pay off the balance in full before the due date, but still, this is an eye-opener. You’re probably thinking, wow, nearly 39 years–Kurt’s balance must be huge! What’s your guess? $12,000? $25,000? $30,000? Not even close.

credit card balance

Thirty-nine years to pay off less than $2,000. Shocking, isn’t it.

Why Do Minimum Credit Card Payments Make Such Glacial Progress?

Making the minimum credit card payment reduces your balance so slowly for a straightforward reason: Your credit card issuer does not want you to pay off your balance. It likes to earn interest, naturally. To help make that happen and stretch out your payments for astonishing time periods, your minimum payment will drop as your balance slowly drops. Mathematically, a graph of your balance will approach $0 asymptotically, like this:

minimum payment effect on credit card balance

See how the closer your balance gets to zero, the slower your progress on paying off the debt? That’s because, all along the course of this curve, your credit card issuer is reducing your minimum payment. Its aim is to string you along for as close to forever as legally possible.

The Moral

Don’t think your credit card issuer is doing you a favor by keeping low your minimum payment. Minimum payments are a trap, purposely designed to separate you from as much cash as possible, through wasteful interest costs. You can use the debt payoff calculator on the left sidebar of this site’s homepage to figure your monthly payment to pay off your debt in the time frame you choose, not the timing chosen by your card issuer, in its best “interest.”

12 Comments

  1. AverageJoe

    Great piece, Kurt, that makes me wonder: why is it that so many people make awesome decisions about money and productivity at work but then make emotional decisions in their financial life? This credit card example seems simple: if you’re a company, you’ll secure the best repayment terms possible (low minimum payment just in case you run into cash flow issues), but set YOUR OWN repayment plan based on your own priorities. It shouldn’t be rocket science, but I’m starting to believe that it is.

  2. William_Drop_Dead_Money

    Great point. I see it as symptomatic of a group of people who view their lives in terms of “making payments.” These people look at their income and essentially figure out how to divide their entire income over as many payments as they can squeeze in.

    Needless to say, that’s a recipe for disaster, as you pointed out clearly.

  3. I’ve never paid the minimum on my credit card, except for one time when I was 18. i got charged like 20% interest and FREAKED OUT! I never let that happen again. They aren’t your friends, they are there to make money. Take advantage of the rewards, but only if you have the cash to back it up!

    • You’re right IHB, rewards are credit card issuers’ bait. It’s tempting to think, “so what if I paid $30 in interest this month–look at all the points I earned!” Overall, if credit card companies didn’t come out ahead by offering rewards, they wouldn’t be offering them, right? So that means consumers overall come out behind.

  4. Kim@Eyesonthedollar

    I think so many people see minimum payment and think, “I can afford that, ” not realizing the real cost over time. I think any payment except the full payment is poor judgement. I’ll never do that again.

    • Great point. And the salespeople encourage this mentality. How many times have you heard, “So how large a payment can you afford?” In other words, if you have any room in your budget to make a debt payment, then you can afford the debt! Right? Wrong!!

  5. Wow. I knew it would take a long time to pay off a balance with minimum payments, but I didn’t think it would be that long. I pay my credit cards off monthly because I don’t like paying interest.

  6. If you’re one of those people that pays the minimum payment, PLEASE borrow money from me! 😉 Yikes…
    -M

  7. Make commitment not to buy things with money you don’t have. That simple rule will transform your mind to live a happy and fulfilling life.

  8. Jason @ WorkSaveLive

    It’s a smart business model and they really do take advantage of ignorant consumers. Instead of setting the minimum payment at a flat $100 or $50/month, making it 1% or 2% of the balance ensures that the payment will go lower each month therefore stringing out the payments for decades.

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