Minimum Payments Will Cost You

Aug 24, 2012 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.”

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