Ever made a minimum payment on a credit card bill? We’ve all done it, and maybe even made a habit of it. But minimum payments’ convenience can cost you a lot more in money and time, ultimately making it harder to get out of debt. Let’s break down why that is — and what you can do instead.
What Minimum Payments Are Designed to Do
The most important thing to know about minimum payments is that they’re not designed to help you pay off debt — quite the opposite. They’re an accessible way to keep your account current and ensure your access to credit, but the flipside is that you stay in debt for much, much longer. They may keep you out of trouble with your lender, but they’ll make it much more difficult to live a financially-free life.
What Happens When You Only Make Minimum Payments?
Often all — or the vast majority — of your minimum payment goes towards interest, not your balance. That means your debt can continue accruing interest, keeping you on the hook for those minimum payments.
In other words, the system is designed to stretch out how long you’re in debt. That’s good for the lender’s business — but not your own interests.
Let’s Say You Have a $3,000 Balance
To illustrate, let’s pretend you’ve got $3,000 on a credit card with a 24% APR. If your minimum payment is 3% of the balance, your first payment would be around $90. Affordable, right?
But if you only pay the minimum each month, it could take nearly 20 years and about $5,300 in interest to pay it all off.
Compare that timeline to one in which you pay an additional $50 per month. By making fixed, $140 payments, you’ll be debt-free in a little under 2.5 years and will spend about $950 on interest. Not ideal, but much, much less expensive than those minimum payments.
Getting Out of the Minimum Payment Trap
Minimum payments are a way to protect yourself from falling into bad standing with your creditors, but they’re not an ideal place to stay for too long. Here are a few strategies to help you move out of the minimum payment doldrums.
Idea 1: The Step-Up Method
Start by adding just $10 more to your minimum payment, then add another $10 each following month. Keep building that amount as you can afford it. This method makes it easy to ease into a new, more expensive payment.
Bonus points if you call your creditor and ask that your payments be applied primarily to your principal instead of interest. You’ll be amazed by how quickly your debt can shrink.
Idea 2: Use Found Money for Extra Payments
Tax refunds, work bonuses, rebates or even birthday cash can all be used to knock down your balance. These one-time payments go straight toward the amount you owe. You’ll see a bigger impact faster than you might expect.
Idea 3: Split Your Monthly Payment into Two
Can’t afford to pay more? Then paying more often may be the advantage you need to get a leg up on your debt.
If you’re paid every other week, set up payments to align with your deposit schedule. Paying twice per month instead of once helps lower your average daily balance, which can reduce the interest that builds up. Just be sure to clear your new plan with your creditor, first.
Feeling Cornered? You Have Resources.
If you’re dealing with more than one credit card and feeling stuck, debt consolidation might be an option to explore. With Accredited Debt Relief, you can slash your eligible monthly debt payments by 40% or more, and even get debt-free in as little as 24-48 months.