Credit Card Minimum Payments

Paying just the “minimum payment” on your credit card bill is not recommended; the amount is designed to let your debt accumulate and keep the account’s interest accruing for as long as possible so the bank can make a profit.

When you make a payment, the bank first applies your payment to the accumulated interest; only the remaining amount is applied to your principal (original debt). Here is an example:

• Annual percentage rate (APR): 20%
• Minimum monthly payment: $100
• Monthly interest: $5,000 × (20% ÷ 12) = $83.33

Out of your $100 payment, $83.33 goes to interest and only $16.67 reduces your balance. After paying $100, you still owe the bank $4,983.33.

If you continue paying only the minimum, it will take over nine years to pay off the debt and you will pay approximately $10,800 in total for a $5,000 purchase. In effect, you pay for the item more than twice.

If you are paying down a card balance, stop using it. Pay more than the minimum whenever possible. Every extra dollar that goes directly toward reducing the principal shortens your payoff time.