Credit Cards

Why You Should Always Pay More Than The Minimum Amount Due on Your Credit Card

Paying just the minimum amount due is one of the costliest financial mistakes one can make – both in terms of time and money. We examined the effects of paying just this amount on an average credit card balance to see how long it would take to be totally debt-free, and how much in interest one would have to pay over this period.

It will take over 27 years for the average American to pay off their credit card debt, assuming they stick to making just the minimum payments. By that time we’ll be getting ready for Super Bowl LXXVII (77), for which the half-time performer could very well be a 63-year-old Adam Levine or a 94-year-old Steven Tyler. Over this quarter of a century, the consumer would pay approximately $20,000 in interest - all of this, under the optimistic assumption that no new charges are put on the account.

These figures are obtained by looking at average U.S. credit card debt and interest rates. Based on the latest data from the Federal Reserve, the average credit card balance of an indebted household is roughly $15,863. The mean credit card APR, based on a database of over 200 cards, is approximately 17%. To obtain the time it takes to pay off the debt, we modeled credit card debt payback by using a common method banks employ to calculate minimum monthly payments – 1% of your total amount due plus last month's interest. Because your payments are based on the percentage of your outstanding balance, as your debt shrinks so do your payments. While it is possible a consumer may be able to afford paying significantly more towards their bill, minimum payments extend the total time it takes to repay the debt.

Time Needed To Pay Down Average Credit Card Balance With Minimum Monthly Payments

Though it may seem unbelievable at first glance, these numbers represent just how much of a financial trap minimum credit card payments are. One of the biggest myths prevailing in credit card usage is that minimum monthly payments are designed to help consumers get rid of their balance in a timely fashion. As you can see from the example we go over above, this is untrue. Minimum payments will cause interest charges to skyrocket, inflating the total cost of your credit card loan. This problematic financial situation can be avoided in several ways.

Don't carry a balance on your credit card - ever. If possible, avoid putting any charges on your card that cannot be paid off in full by the end of the month. Letting this rule slip, little by little, can quickly cause your debt to snowball into an out of control beast.

Stick to a fixed-payment credit card payment plan. Ideally, you should be putting away as much as you can afford towards your credit card bill. Just because you're putting a dent in your total outstanding balance, doesn't mean you should relax and pay less. If the average consumer we examined were to pay $300 every month, the time needed to pay down that debt would be cut down to 8 years, reducing their total interest paid by close to $8,000.

Use one of the many balance transfer credit cards to avoid paying interest for a few months. Your interest payments are top-heavy – the largest chunks occur while your balance remains high. Using a balance transfer credit card a consumer can get anywhere between 12 and 21 months of zero percent APR – a period of time that can translate to big savings. In our previous example, by deferring interest for the full 21 months, a cardholder could save approximately $7,000.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

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Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).

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