How Minimum Credit Card Payments Will Keep You in Debt Forever

by Joe Plemon on May 12, 2010

Did you know that making your minimum credit card payment every month will take you as much as four times longer to get rid of debt than making a fixed payment?  I recently ran across a nifty calculator at Bankrate.com that I recommend looking at.  When  I plugged in $5,000 debt at 12%  interest with a minimum payment of $100 I was shocked to learn that this $5,000 was going to take 259 months to pay off!  The same numbers on my financial calculator showed only 70 months for a pay off.  “OK”, I muttered, “What goes?”

Minimum Credit Card Payments

Make sure you read the fine print about minimum payments

Creative Commons License photo credit: TheTruthAbout…

Question: Obviously, something was haywire, but what was it?

Answer: I didn’t understand how minimum payments are figured.

Explanation: The minimum payment decreases as the payoff amount decreases.

In the scenario I tried, the minimum payment was based on the interest owed for that month plus 1% of the payoff.  For the $5,000 debt, the interest for the month 1% (1/12 of 12%), or $50 and of course the 1% of the payoff is also $50 for a total minimum payment of $100 the first month.

The Minimum Credit Card Payment Strategy

Now: follow along with me, for this becomes a bit diabolical:  using this same formula (the interest plus 1% of the payoff), the minimum payment the following month becomes $99.  As the payoff becomes less, the minimum payment continues to likewise decrease, thus stretching the debt for years and years.  The 259 months (21 years and 7 months) is based on never borrowing any more money and never being late on a payment.  Of course either of these events will lengthen the payoff even more.

The calculator gives different choices for calculating a minimum payment, but they are all based on the same premise: the minimum payment decreases as the balance decreases, thus keeping the borrower in the grips of the credit card company for years more than needed.  I should point out that all credit card companies do not figure their minimum payments the same way.  This post at Credit Card Chaser answers the question, “How do credit card companies figure the minimum monthly payment?”

This chart compares various minimum payment plans with fixed rate payments.  All are based on $5000 debt and 12% interest rate.

Beginning Minimum Payment Months for Minimum Payment Payoff Fixed Rate Payment Months for Fixed Rate Payment Payoff
Interest Rate + 1% of Balance $100 259 $100 70
3% $150 155 $150 41
4% $200 114 $200 29
5% $250 92 $250 23

Concluding Thoughts on Minimum Credit Card Payments

The numbers are obvious.  Do you want to be paying on that same credit card until your newborn is out of college?  Of course not.  This math is not rocket science, but it can be deceiving.  The more you pay, month in and month out, the quicker your principle will drop, the less interest you pay and the faster you can get rid of your debt.

Remember: your credit card company doesn’t want you to get your debt paid off.  The longer you drag it out, the more you end up paying and the greater risk of adding to the debt or being late on a payment.

Escape their tentacles by sacrificially making huge payments!  If you could bump that payment to $400 a month, the debt will be gone in only 14 months.  Get an extra job and pay $600 a month to see it disappear in only 9 months!  You will be able to breathe knowing that the debt has lost its grip on you.

And 9 months sure beats 259 months!

Readers: Do you make minimum payments on your credit cards?  Before reading this post, did you know how long it will take you to get your credit card debt paid off by making minimum payments?  Are you currently attacking your credit card debt?  If so, what are you doing that works?  That doesn’t work?

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{ 18 comments… read them below or add one }

FinancialBondage May 12, 2010 at 11:08 am

it’s designed to keep us in debt forever. Even more so now with new bankruptcy laws that were changed in 2005 in the credit card companies favor. It’s more difficult to get a chapter 7 now. So even if you go broke and file for bankruptcy, you likely will get a chapter 13 which means you still owe some money. Statistically, most people default on the chapter 13 after a short amount of time, and start all over again, an endless cycle.

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joeplemon May 12, 2010 at 11:57 am

Yes, Arthur, the prospect of being in debt (financial bondage) forever is indeed dreary. I wonder: do you have statistics about how many people default on their chapter 13 bankruptcies? Sounds like an intriguing idea for a post, to follow people through, as you call it, this “endless cycle”.

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Arthur @ FinancialBondage.org May 12, 2010 at 6:27 pm

Joe, the book Outrage by Dick Morris has a chapter on the 2005 bankruptcy bill changes…. it did have some number on that as I recall… I’ll see if I can dig the info up….

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Arthur @ FinancialBondage.org May 12, 2010 at 6:56 pm

found the info Joe…. I saved it.

from the book Outrage, by Dick Morris…

“most people find it impossible to make the required payments over a 5 year period, so around 75% of chapter 13 bankruptcies fail. Then, with the debt unforgiven, the hounding by the creditors resumes– but this time the debtor has no shelter until two more years pass… then the debtor can file again and begin the process all over again”

shoot me your email Joe if you could… I had a pdf file id like to send you.

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Roshawn @ Watson Inc May 13, 2010 at 12:04 pm

Joe,

I completely agree. The system is designed to enrich themselves off of the poverty of people who don’t know any better or who don’t care. Yes, people should read their statements, or better yet avoid getting the statements in the first place (don’t get in debt).

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joeplemon May 13, 2010 at 12:12 pm

Roshawn,

How very clever: “avoid getting the statements in the first place”. How I wish that message would sink in to everyone who reads both of our blogs!

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Kevin@InvestItWisely May 13, 2010 at 1:02 pm

I find it hard to feel sorry for people whom have gone in credit card debt to buy plasma TVs, expensive stereos, or what not. They really should know better. On the other hand, financial education is not taught in schools so many people aren’t aware of the compounding effects of debt; they believe they are getting something for free, but in reality, they are getting hoodwinked.

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Car Negotiation Coach May 13, 2010 at 6:12 pm

Hey Joe, Thanks for stopping by earlier!

It seems like a crime that credit card companies are allowed to operate the way they do. I was brought up to pay off my balance in full each month…and if you don’t have the money, don’t spend it in the first place. But I understand that sometimes life throws curveballs at you and sometimes you do need to go into debt. That being said, you’re absolutely right, focus on wiping out that debt as soon as possible and don’t set minimum payments on autopilot!

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joeplemon May 13, 2010 at 7:07 pm

@kevin,
I agree that we are all responsible for our own actions…it is just that people are gullible and naive. They bite the credit card bug and get hooked before they know it. Good motivation to educate our kids.

@coach,
You were brought up like me, except credit cards hadn’t been invented when I was young. You either saved up for something or you just didn’t get it.

The “autopilot” of minimum payments is all too easy a trap to fall into. Well said.

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Little House May 13, 2010 at 7:29 pm

I love calculators, especially amortization charts…they’re my new best friend. It really is “diabolical” (love that word) as you said that credit card companies purposely keep people in debt longer than they should. However, with the new CARD act, many credit card statements now show how long it will take to pay off the debt by only paying minimum payments. Hopefully that will help people who are not as financially savvy.

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joeplemon May 14, 2010 at 9:27 am

Little House,
I did not realize that the new CARD act requires issuers to show how long it takes to pay off the debt using minimum payments. This is a good thing! Is it true for all credit card statements?

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Joe May 14, 2010 at 3:41 pm

I’ll admit I had never actually done the math to see how long it would take, but I did realize that I had been carry around my credit card debt for years without ever really seeing it go down. I’d throw an extra 100 or so at it when I bought $500 worth of stuff, but it would just slowly climb back up again.

Then I got serious and put every extra dime I could find into my monthly payments. That was 5 years ago and I haven’t carried a balance since.

Of course, I wish I had see the math because I would have paid more than the minimum long before!

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joeplemon May 14, 2010 at 4:54 pm

@Joe,
Good for you for getting serious five years ago. I bet it feels good knowing that you are no longer carrying this weight around. The math on minimum credit card balances is insidious isn’t it?

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Ryan May 17, 2010 at 8:55 am

Joe, yes, CC companies are now required to post the payoff schedule on all credit card statements. I believe it is broken down for minimum payments and for paying off the credit card in 3 years. The transparency is a step in the right direction. :)

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joeplemon May 17, 2010 at 1:34 pm

Ryan,
Thanks for confirming these CC requirements. This is indeed a step in the right direction. Now….if people will only read those statements.

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Mary August 10, 2010 at 1:47 pm

Anyone likes their new credit cards statement now than before like I do? Since the credit card new regulations were inacted this year, many people have learnt what will happen if you keep on paying the minumum. The statements are now visible enough and well written

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joeplemon August 10, 2010 at 5:35 pm

Mary,
This is great to know. I was wanting to hear some thoughts about how the new credit card statements are being received, so I appreciate you letting us know. I am planning to write a post on the new statements, so this helps. I am at a handicap because (not trying to sound smug or anything like that), I don’t have any credit cards so I don’t actually see the statements. Other than the ramifications of paying minimum payments, is there anything else you like about the new statements?

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michael @ credit cards October 17, 2010 at 6:18 pm

This is such a sad fact that if we are not able to pay in full our credit cards, the more and more we are committed to pay the added charges and interest monthly. Moreover, takes more years to wash this out if we do not think of other ways to pay it off.

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