Paying only your credit card’s minimum keeps the account current but barely reduces what you owe, since most of a typical minimum goes to interest. The minimum also shrinks as the balance falls, which adds years to the payoff. Pick a fixed monthly payment at least as large as this month’s minimum and stick to it.
Take a $5,000 balance at a 24% APR, the card’s yearly interest rate, and the first month’s interest comes to about $100. A minimum of that interest plus 1% of the balance is $150, and only $50 of it goes to the balance.
Large issuers mostly set minimums that way, with a floor of around $25 to $40. Chase’s formula, for example, is 1% of the new balance plus the interest and late fees billed, or $40 if that’s more. Some cards, many from credit unions, take a flat percentage of the balance instead, often 2%. Either way, the minimum is a share of the balance, so it shrinks as you pay.
A year of minimums on that $5,000 card cuts the payment to about $133, and just $44 of it goes to the balance. By our math, paying only the minimum takes more than 15 years and over $8,000 in interest to clear the card.
Pay a fixed $150 instead, the same as the first minimum, and the shrinking interest leaves more of each payment for the balance. A year in, $63 of the $150 goes to the balance, and the card is paid off in under five years with about $3,300 in interest.
To set it up on your own card:
- Find the minimum payment formula in your cardholder agreement. The Consumer Financial Protection Bureau’s credit card agreement database has recent agreements from hundreds of issuers.
- Subtract the interest and any fees on your latest statement from the minimum due. What’s left is all that payment takes off the balance.
- Switch autopay from the minimum due to a fixed amount at least as large as this month’s minimum. If your issuer has no fixed option, schedule that payment yourself each month.
Raise the fixed amount whenever you can, and keep new purchases off the card until the balance is gone.
Editorial & Advertiser Disclosure: The editorial content on this page is not provided, commissioned, reviewed, approved, or otherwise endorsed by any advertiser. Opinions expressed here are ours alone, not those of any advertiser. The offers that appear on this site are from companies that compensate us. That compensation may influence which products we cover and where and how they appear on a page – including the order in which they appear – but it does not influence our evaluations, ratings, or opinions. We do not include every company or offer available in the marketplace.
Related:
