The minimum payment is the smallest amount of your balance you can pay and still meet the terms of your credit card agreement. Making the minimum monthly payment allows you to avoid late fees and to have a good repayment history on your credit report.
But the truth is: if you are consistently only able to make your minimum monthly payment, it is a red-flag that you may have a serious debt problem.
It will take years to pay off your debt, assuming you do not make new charges. Over the course of these years you will continue to accrue interest charges and you will ultimately pay back far, far more than the principal amount you charged.
Carrying credit card debt forward is not a wise financial decision. If you truly can only make the minimum monthly payment, then it is time to make an honest assessment of your overall financial situation. If you cannot reasonable pay off your credit card debts within 3 years, then it is time to consider filing for bankruptcy.
What It Really Means to Make Minimum Monthly Payments
The minimum payment amount is calculated off of a percentage of the total balance. Typically your minimum monthly payment might represent as little as 1 or 2 percent of the total balance you owe. This is why it takes years to pay off a credit card making only the minimum monthly payment. This is also how credit card companies make a fortune in interest off of consumers.
Thanks to the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, our credit card statements are required to have a minimum payment warning. The disclosure must inform you of:
- How many months it would take you to pay off your balance making only the minimum payment.
- The total amount you would actually pay back making only the minimum payment.
- The calculation is based on no new charges being made.
Many people are shocked to find out just how much making only minimum monthly payments actually costs. It is not uncommon for a borrower to pay back more than twice the amount that was actually charged to the credit card.
Paying the Bare Minimum – An Example
The following is an example demonstrating the massive cost of paying only your minimum monthly payment.
Assume you are carrying a credit card balance of $1,000 with an annual percentage rate (APR) of 18%. Assume also during this time period you make no additional purchases on the card.
- Monthly Minimum Payment, calculated as 2.5% of your total balance: $25.00
- Number of Months To Pay Off Debt: 63 (that’s 5 years and 3 months!)
- Total Interest Charges During 63 Month Payback Period: $566
By paying just the minimum payment due each month on $1,000 of debt, it would take over 5 years to pay off the debt and you would ultimately pay a total of $1,566.
If you pay twice the monthly minimum payment, the repayment period is cut by more than half. In this example, if you pay $50/month it will take 25 months to pay off the credit card. You would pay a total of $1,205, saving you $361 in interest charges and getting you out of debt three years sooner!
Certainly, the best option is to pay your credit card balance in full each month. Of course this is not always possible. When you are carrying credit card debt, be diligent to pay it off as quickly as possible. As you can see in the example above, paying even just double your minimum monthly payment makes a significant difference.
Minimum Monthly Payments & Exploring Bankruptcy
Bankruptcy erases credit card debt and allows people to get out from under the weight of debilitating debt that would otherwise have lasted many years.
Bankruptcy is a powerful legal tool that can help you in many ways. To further explore how bankruptcy can help you and if it is your best debt relief option, read our articles:
- 4 Signs that Bankruptcy is Your Best Debt Relief Option
- When Bankruptcy is the Best Choice
- Top 5 Things To Know About Bankruptcy
- You Have Bankruptcy Questions, We Have Answers
We’re committed to helping people get out of debt and gain the financial freedom they deserve. We invite you to learn more about who we are here. If you live in Savannah, GA or the surrounding areas and have questions about your debt relief options, let’s meet for a free consultation.
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.