Making Credit Card Minimum Payments Every Month is Bad for Your Budget

When consumers think of credit card debt they often consider only the minimum payments per month. The ability to pay a very small portion of credit debt has resulted in an estimated 40% of Americans carrying a revolving balance on one or more credit cards.

If they make the small payment monthly their account remains in good standing. Many people don’t stop to realize that the new clothes they bought in 2008 might still be carried in the credit balance in 2017.

In fact, paying off $1000 in purchases charged to a credit card with low minimum payments and high interest rates can take as long as 22 years to pay off!

This is not a new fact, yet banks don’t make a point of telling you how long it will take to pay off that $1000. Instead, they want you to keep paying monthly and keep paying that interest because that’s how they earn more money!

Debt Lasts Longer Than Many Marriages

Think about it – credit card debt lasts longer than many marriages do. For the 40% who carry revolving balances, it is estimated the average credit debt for those who make up that group is $10,000.

If you pay it off by paying only the minimum payment due each month (and add no more charges to the account), that consumer would be paying for over 20 years. Plus, the interest paid by the time the $10,000 debt is cleared could be over $9700.

Why is this true? Well, as you pay down your credit cards balance, the minimum payment due each month also goes down. So, you pay a little less each month and that stretches the debt out year after year. There’s a simple solution that lenders don’t mention to you.

If your payment this month is $300 on that $10,000 debt and you pay that same $300 every month even, though the minimum due is less, you will pay off that debt in 4 years and it will also cost less than $3700 in interest charges.

You aren’t paying extra – but you are changing your payments from “minimum due this month” to “fixed payment monthly”.

For years, credit lenders required only 1.5-2% of the balance carried on the card to be paid as the minimum amount due. Customers saw “low payments” but lenders were seeing 97-98% of the balance carried from month to month with interest charged every month.

Pressure From Government

Under pressure from government, several major credit card companies raised the minimum amount due to 3-4% in 2005.

This was good for those consumers able to make higher payments. However, the change was devastating to customers who were scraping to meet the current minimum payments.

The opinion issued by Federal regulators was that by increasing the minimum payments, consumer would pay off debt faster and spend less on interest charges.

The Feds also required that banks add a Public Service warning on every bill clearly stating that paying more than the current minimum credit card payments will get yourself out of debt faster. Is there any credit card holder that didn’t know that?

Those public officials offered no advice to consumers on how they were to meet payments that would double immediately.

Some of those same credit card companies have now announced a new standard minimum payment of 5% of the balance. This change is widely criticized as it comes during a time of economic hardship for many people.

Companies Offering Bonuses

Some financial companies have offered bonuses to help consumers deal with the increased payments. They are aware they may need to be more flexible in negotiations about interest rates and fees and some are offering to suspend payments if the consumer loses his job.

This is a case of taking medicine that will cure you but tastes terrible as it goes down. Families already stretched to the limit financially now have to find extra money to apply to credit card payments each month.

Those who are currently working hard to get out of debt won’t be hurt badly as they are most likely already paying more than the minimum payment.

Let’s face it – it was, in part, those low minimum payments that led many of us to use credit cards more than we should have.

With payments that reflect the amount of debt more accurately in payments required, perhaps we’ll learn to use credit only when it is necessary.