Okay, if you read my blog on Jan. 14th, you know where I stand with credit cards.
Today I want to discuss minimum payments and why you won’t win by just making the minimum payments.
First and foremost, the government by acts in congress has regulated the credit card industry and all their card details can be found in your statements or, lucky for me, on their website since I don’t currently have a credit card statement.
I shopped around and I found an example of the average credit card rate, terms, and policies. I’m going to assume the following:
A "good" credit rating as opposed to a fair or excellent.
We are past any ‘introductory’ periods, which tend to be standard of 0% interest for a period (15–18 months), and the card I chose has a purchase interest rate of 16.99%.
We are going to assume we are in good standing with no late or missed payments. Doing so allows them to apply more fun things like fees and more complex interest calculations. They can even change the interest rate.
There will be minor discrepancies in my math since most interest is calculated using a daily periodic rate. I’ll be calculating on a monthly statement date while still applying the same APR. I know there will be some imperfections to doing the math this way, but the errors won’t take away from the general point I’m trying to make: minimum payments benefit credit card companies, not you.
After the above assumptions, we have a credit card with a zero balance, and we choose to make a $1000 purchase. Upon getting my first statement (based on the details provided on my chosen average credit card), my minimum payment will be either the full amount if the balance is less than $25, or the greater of $25 or 1%+new interest.
Let’s look at our situation. Balance: $1000, 1%+new interest is $23.80, which is below $25, so our minimum payment will be listed at $25. After we make our $25 payment, our new balance is $988.80.
We then repeat this process for approx. 58 months. Yes, do the math. That is just short of 5 years. Total interest paid is over $400 and you have had to pay this on-time without a miss for almost 5 years. Any misstep and you get fees and maybe even a higher interest rate along the way.
Do you see how minimum payments won’t get it done? Especially if you continue to use your card while making minimum payments. At some point, you must stop using the credit cards and accelerate your payments to break this cycle of debt.
Am I making you angry yet? I hope so. Anger really helps the fire when you truly decide to get out of debt.
*Blog teaser: minimum payments do have a role to play when dumping debt; that’s next week’s blog theme: Debt.