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Minimum Payments Perpetuate Debt
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
November 11, 2002
If you only make the minimum payment, you may never pay off the credit card.
Most card issuers require a minimum payment of 2% of the outstanding balance, according to Bankrate.com. But minimums can be higher or lower depending on what kind of credit risk you are.
The thing to keep in mind is that unlike installment loans, which guarantee a payoff at a specific date when you pay a specific amount, the minimum payment on a revolving account is a moving target. As your balance drops, so does your payment. Of course, the less you pay, the longer it takes to pay off the balance. The longer you take to pay off the balance, the more interest the bank can charge you.
For example, let's say you have a $3,000 balance on a credit card with a 14% interest rate. If you pay the minimum 2% each month it would take you more than 24 years to pay off the debt. Even worse, you'd wind up spending more than $3,750 on interest. And if you were to continue making charges on the card, you could stretch your payments on forever.
For a personalized guesstimate, run your numbers through Bankrate.com's The True Cost of Paying the Minimum calculator.
There are plenty of ways to avoid this debt-spiral. First, consider making fixed-dollar payments instead of the minimum printed on your bill. If you were to pay $75 a month on the balance above, you'd pay off the card in less than five years, and spend less than $1,100 in interest.
You can also speed up your pay-off date by transferring your balance to a credit card with a lower interest rate. To find a low-interest credit card, ask your lender if you can get a better rate and check out the top deals on low-rate cards at Bankrate.com. Just be sure you keep an eye on balance-transfer fees and how much you'll pay after special introductory offers end.