DANGEROUS!! Paying the Minimums on Credit Cards

Thanks to the CARD Act, credit card issuers overtly disclose how much interest you’ll pay on credit card debt if you only make the minimum payment.  They also have to disclose how long it will take to pay off a card by just paying the minimum.  “How can this be right…22 years to pay off my $15,000 balance?”   I’ve spoken with many consumers and I can tell you that a lot of people think the information is a misprint.  How can it take 22 years to pay off a $15,000 credit card debt?

I have used a couple of real examples to show you the impact of paying the minimum on moderate balances of $680 and $1424. To make things simple, each example assumes that no more is charged to the account during the time frame and the interest rate is 14.5%. You will see how fast interest adds up!

The first example is a bill for $680, if you make the minimum payment of $15 a month, it would take 6 years to pay. The total amount paid would be $991, with $311 of it in interest charges. This is almost 50% of the original bill.  If you pay more than the minimum or $23 a month for 3 years, you would pay $842 and $162 in interest. You save $149 paying it 3 years earlier.  Either way it is still a very long time to pay a bill totaling $680.

Monthly payment    Pay off in years      Amount paid          Interest

$15                             6 years                       $991                           $311

$23                             3 years                      $842                           $162

The next example is a bill for $1424.  Paying the minimum of $28 a month would take 12 years to fully pay off the balance.  The payments total $2,662, with $1,238 of it being interest. This is 86% of the original bill. If you pay more than the minimum of $49 a month, you would pay the bill off in three years which is 9 years earlier. You pay $1,764 and $341 in interest; the savings of $897 is substantial.

Monthly payment    Pay off in years       Amount paid                        Interest

$28                             12 years                    $2662                                    $1238

$49                             3 years                      $1765                                     $341

In addition, if you don’t pay the bill within the date it is due, a late fee of $35 is added to your bill.  And, your interest rate could also go up as a result.  Look at your cardholder agreement, if you haven’t thrown it away, for the “default rate.”  That’s the rate they can charge if you miss a payment.

I don’t know about you, but I don’t like paying interest.  We get nothing in return for paying interest on credit card debt, including any sort of tax deduction.  It’s wasted money that takes away from our ability to build wealth.  I can think of many things to do with that extra money…giving it to a bank isn’t one of them (unless I’m depositing it in a saving account).

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Debt, Debt Management, Money & Identity, Saving Money

This post was written by John Ulzheimer