Credit Card Minimum Payments

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Many consumers keep their creditors at bay by paying only the minimum payment each month. Even worse, some keep racking up new debt and their balances keep climbing. Before 2005, minimum payments were set so low (2% of the total debt) that many people were paying practically none of the principal balance and just interest, creating an endless cycle of debt.

Since then, Federal regulators have pushed for higher minimums that would allow consumers to pay off their balances in a reasonable amount of time, which they define as seven and ten years. While the Fed has allowed credit card issuers to set their own minimums, many have chosen to follow a “1% plus” policy. The payments would be 1% of the principal balance, plus interest and fees. Today, the average minimum payment is around 3%.

Why to Avoid Paying Only the Minimum

Even with higher minimum payments, it can take years for consumers to pay off their debt if they continue to pay only the minimum. With large balances carried from month-to-month, the prospect of getting additional credit, such as a mortgage or car loan, may become more difficult as well. Here’s an example of how long it would take to pay off your debt paying only the minimum:

Let’s assume you have $10,000 in credit card debt. Your interest rate is 12% and you have a minimum payment of 3% (which you’ll continue to pay):

$10,000 x 3% = $300 MINIMUM PAYMENT

Month Minimum
1 $300.00 $100.00 $200.00 $9,800.00
2 $294.00 $98.00 $196.00 $9,604.00
3 $288.12 $96.04 $192.08 $9,411.92
4 $282.36 $94.12 $188.24 $9,223.68
5 $276.71 $92.24 $184.47 $9,039.21
205 $10.00 $0.49 $9.51 $39.97
206 $10.00 $0.40 $9.60 $30.37
207 $10.00 $0.30 $9.70 $20.67
208 $10.00 $0.21 $9.79 $10.88
209 $10.00 $0.11 $9.89 $0.98
210 $0.99 $0.01 $0.98 $0.00

In this example, if you paid just the minimum payment and continued to pay the minimum (which reduces each month), it would take 210 months, or almost 18 years to payoff your debt. It would cost almost $5000 in interest!

Always Pay More!

Whenever you make a payment larger than the minimum, it helps pay down the principal faster. Not only will you get out of debt quicker, but over time, you’ll pay less money on interest charges. By learning to live within your means and using credit sparingly, you’ll have the best chance to reduce your overall credit card debt in a timely manner. This will result in a lower ratio of debt to available credit, which will open up more financial opportunities in the future.