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Minimum Payments Cause Maximum Financial Pain

Paying only the required amount on your credit card costs you big time.

Making the minimum monthly payment on your credit card will eventually pay off the balance.

But it will take a long time -- and it will cost you. In some cases, in fact, the interest payments can add up to more than what you originally owed.

The minimum payment on credit cards is often just enough to cover the interest and financing charges for the month, with only a little extra to pay down the balance. The more slowly your balance drops, the more interest you pay over time.

Worse, because credit-card companies don't have to be clear about how they calculate the minimum payments (unlike the upfront disclosure requirements for rates and fees), consumers are often left without enough information to make responsible choices about their debt.

So how long will it take to pay off your credit card if you make only your minimum payments? Use the

Credit Card Minimum Payment Calculator

from to find out.

All you need to enter is your credit-card balance, the interest rate you are paying on your balance and the minimum payment (as a percentage) that your credit-card company requires you to pay each month.

Say that you put a midwinter vacation on plastic, resulting in a $3,000 balance. You pay 15% interest on your balance, and are making all of your required monthly minimum payments of 2% (or $60).

So how long would it take you to pay off that trip? It would take 26 years and four months to pay it off -- and along the way you would pay another $4,456.43 in interest.

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What if you picked your own minimum payment each month and paid that instead? Raising your minimum payment to 4% (or $120) means you would pay off your balance in just less than 10 years, and only pay an extra $1,301.54 in interest.

Making the minimum payments each month gives consumers a false sense of financial security. After all, you are paying what your credit card is asking you to pay. And for many households, paying the minimum each month frees up a little space in the budget to meet other needs. But the cost of the loan is extremely high under these conditions, and made much worse if you continue to use your card to make purchases.

That is one of the reasons a bill before Congress (

Bill S.1176: The Credit Card Minimum Payment Warning Act of 2007

) attempts to make credit-card companies disclose more details about the minimum payment. These details include:

  • How long it will take to pay off the balance when making the minimum payments.
  • How much additional interest consumers pay over this time when they make the minimum payment.
  • How much consumers should pay each month in order to pay down their balance within three years.

Don't hold your breath -- similar bills in previous sessions didn't get passed. Meanwhile, the online calculator will tell you what you need to know.

Peter McDougall is a free-lance financial writer in Freeport, Me.