Minimum payments get

you nowhere quickly

A reader asks.. “Why is it that I am making the minimum payments, but don’t seem to be getting anywhere close to paying off my credit card?”

Credit card interest payments and minimum payments will eat you alive! Usually credit cards are spread over a five or six year life, while some base the payment on 2 or 3% of the outstanding balance each month. Each time you make a charge, it extends the entire balance out another five to six years.

For this example, let’s assume you bought some furniture for $1,000, at 15% interest spread out over 5 years. 15% could be high or low, depending on your credit rating. That $1,000 piece of furniture, assuming you make the minimum payment of about $23 per month, would cost you an additional $427 in interest payments! Your minimum payments of $23 per month will barely cover the cost of the interest you are paying on that credit card. Thus, the balance does not go down very quickly.

That is a huge premium to pay for $1,000 of furniture. Most people have more than $1,000 in credit card debt. Imagine if you had $5,000, $10,000 or more! Many Americans find themselves struggling to make ends meet and one of the major drivers is the interest being paid on their credit cards.

Let’s also assume you made $50 payments on that $1,000, instead of the $23 minimum. Not only do you cut your loan term by 36 months, you also save $269 in interest! That is money in your pocket!

Are credit cards evil? Not if they are handled correctly and with respect. Don’t just make the minimum payment, put some additional money towards principal. You save money in interest and you will also shorten the term you have to pay the loan back.