Pay More Than The Minimum Credit Card Payment, Or You’re A Sucker

The minimum payment on your credit card bill may save you from overheating your brain by actually thinking about what you’re doing, but it’s no way to reduce your debt. AllFinancialMatters lays out the math.

Consider this simplified scenario.

Debt: $5000
Interest Rate: 12%
Minimum Monthly Payment: 2% of outstanding balance
Debt After 5 Years: $2736

“What’s worse, your TOTAL payments over those five years are only about $500 shy of your beginning balance,” says AllFinancialMatters.

Whereas, if you pay $100 each and every month, you’ll only owe $917 after 5 years.

Takeaway: “Don’t fall for the minimum payment trick. Instead, pay as much as you can, as often as you can. You’ll be happy you did.” — BEN POPKEN

Don’t Get Sucked Into the Minimum Payment Trap! [AllFinancialMatters]

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  1. Thaddeus says:

    Credit card companies have a word for people who pay all they can: Deadbeats.

    No joke.

    Check out the PBS Frontline show about Credit Cards… it will make you want to cut them up after watching.
    http://www.pbs.org/wgbh/pages/frontline/shows/credit/view/

  2. Ben,

    Thanks for the mention!

    Thaddeus,

    That’s why it’s best to get out of credit card debt as soon as possible.

  3. NeoteriX says:

    Out of curiosity, is there any reason one wouldn’t want to get out of “debt” as soon as they could pay for it?

  4. thrillhouse says:

    Well, finally some good financial advice when it comes to credit cards. Compound interest is an amazing thing.

    Its important to note about these minimum monthly payments, that prior to action from the federal government, paying the minimum monthly payment would keep you in debt f-o-r-e-v-e-r. There was no way it would pay off that way. Nice people huh?

    If you are in this mess, don’t just start tacking on extra payments to all of your debts. There is a way to do this that not only works, but actually feels like you are getting somewhere. For that, Dave Ramey’s Debt Snowball method is excellent – my wife and I payed off $40k of consumer debt in 20 months. Do it and you’ll begin to understand what is meant by ‘Financial Peace’.

    Now I realize that 5 years was probably chosen just for illustrative purposes… But, there is no reason why anyone should be in consumer debt for more than 2 years. With a few exceptions, the size of the hole is proportional to the size of the shovel. Anyone who gets serious about getting out of debt can get on a budget, sell some stuff, make some sacrifices, and knock it out.

  5. gypsychk says:

    This might be terrible advice, but this worked for me: After buying our first house, my husband and I found ourselves broke for a few months, and with many things to buy. I’d always been one of those “pay everything off, every month” type people, but suddenly found myself in a situation where the two of us carried about $10k on credit cards between us.

    Because I had good credit, I was able to get a zero % interest card (no annual fee, with free transfers), transferred all our credit debt onto it, cut the thing up when it arrived, put us on a very strict automatic monthly payment plan, and got us out of debt by the time the zero % interest offer was over with (one year). Canceled the card and went on with my life.

    It wasn’t easy, and I could have wound up with a crazy interest rate for just one late payment, but some discipline got us $10k interest free for the year. I honestly have no idea how it affected my credit, though … can anyone tell me if this was a stupid thing to have done?

  6. TedOnion says:

    gypsy, who gives a rats arse about how paying off your debt affected your credit rating? You got out of debt! Good for you! Congrats! YAY!

    Yes, your rating suffered. Lenders don’t like people who pay off debt. See thad’s comment above. But you are not suffering because of it. Keep up the good work, build up a nice little nest egg and then buy yourself something nice to reward you for paying off your credit cards.

    p.s. Never get another credit card again, ever. Spend another year on the same plan, and save 10K for a rainy day.

  7. Jon Parker says:

    NeoteriX says:

    Out of curiosity, is there any reason one wouldn’t want to get out of “debt” as soon as they could pay for it?

    If you’re extremely financially astute and you have your money invested in something that’s paying more than your interest rate, yes.

    For 95 percent of people though, getting out of debt as soon as possible is an excellent idea.

  8. Chairman-Meow says:

    I just tried to get my interest lowered on my CC recently and they refused to do anything…why ?

    Because they did not like my charging habits.

    It appears that my spending to paying ratio is 1:10 – in other words I’m paying my card off at a rate that is ten times what i am charging on it.

    When the CSR told me this, I told them right away that I want the card cancelled. They did so without doing anything to retain me.

    So, what do I do ? I got a low apr offer from the exact same bank, mailed it in. Low-and-behold! Shiny new low apr card! I call it in, transfer the balance, and now I have exactly what I wanted in the first place.

    I applied for another low apr card at a different bank, got that one approved. As soon as the old debt is paid off. I will drop that card in the desk drawer for emergencies only.

  9. sporesdeezeez says:

    Out of curiosity, is there any reason one wouldn’t want to get out of “debt” as soon as they could pay for it?

    I agree with Jon Parker in terms of consumer debt. However, even then I think you’re essentially nullifying your return on investment, which I guess makes the debt not a Bad Thing, but by the same token, your ROI is no longer a Good Thing. Kind of a wash.

    I think there is one condition upon which racking up debt is a sound and acceptable move, which is debt for capital. It takes money to make money, as they say, so business expenses are, while technically debt, really investments. This needn’t be much – buying a computer or a professional-grade display for starting web design business, or even an ad-supported blog.

  10. gypsychk says:

    For those who do need credit cards, here’s a site that lets you compare offers: http://www.e-wisdom.com/credit_cards/index.html?g

    Of course, credit card companies are allowed to change offers after you’ve signed up, so always remember to read what they send you.

  11. Josh R. says:

    Here’s something interesting related to making the minimum payments: I have a 0% interest loan (5-year term) from Ford Credit. I set it up with the dealership to pay $300 per month. For the first year I paid $300… and then the minimum payment went down to, say, $296. I kept paying $300 and the minimum kept dropping, all the way down to $285 or so. One month I was a little tight on cash so I only paid $285. The next month, my minimum was back up to $300.

    I don’t get it. Must just be one of those things. Maybe it’s a function of the system that charges people who have an interest rate greater than 0%. *shrug*

  12. Pelagius says:

    Paying it off = good. Check out the graph and explanation of credit score calculation here.

  13. thrillhouse says:

    gypsychk

    It wasn’t easy, and I could have wound up with a crazy interest rate for just one late payment, but some discipline got us $10k interest free for the year. I honestly have no idea how it affected my credit, though … can anyone tell me if this was a stupid thing to have done?

    To go into debt? Yes. To work your tail off to pay it off? Never. This situation is exactly why mortgage lenders see a bunch of credit cards with low balances as a bad thing. You are an accident waiting to happen. You’ll move in, buy new appliances, drapes, furniture and suddenly it becomes, “who gets paid this month”. Believe it or not, people get into trouble like this all the time and default on their loans. As the other commenter noted – keep living this way, build up a huge pile of cash for emergencies and cut up the stupid credit cards.

    sporesdeezeez

    I think there is one condition upon which racking up debt is a sound and acceptable move, which is debt for capital. It takes money to make money, as they say, so business expenses are, while technically debt, really investments. This needn’t be much – buying a computer or a professional-grade display for starting web design business, or even an ad-supported blog.

    Sounds like you took one of those old ‘business finance’ classes in college. Too bad most of the professors who teach that garbage are broke themselves. Debt as an investment? Please – my investments make money. Its always been a bad idea to finance something going down in value (like a car or computer) in personal finance, why would calling it a business expense suddenly make that ok? I know, I know, its making money for you. Well not really. You’re making the money, it is just a piece of equipment. You’ve still taken on all of the risk, you’re still needlessly cutting into your profit to pay finance charges, and you’re still showing imaturity. Be patient, save up the money, and pay for it in cash. You can still take the depreciation on your taxes. A very high percentage of new businesses fail in the first year, why on earth would you want to add unneeded stress and payments to the equation.

  14. kerry says:

    Maybe this is only true of Discover, but I and everyone I know who has one of their cards and pays it off in full every month gets pretty sterling service. When they recently shortened their payment period and I wanted my old due date back, they put me back on the longer float schedule without a fight, without me even asking for it specifically. My mom keeps getting credit limit increases, as does my boss. The flip side of that is a friend who only pays off about 30% of her balance every month who tried to get a limit increase and they turned her down. I don’t think it’s necessarily true that all credit card companies want customers who only pay the minimum balance.

  15. gypsychk says:

    Thanks, all, for the advice. This was a few years ago, and we did do exactly as you suggested. So now our collective ass is in ice cream, as it were.

    Kerry: I’d always assumed that credit card companies firehose higher limits at me because they’re not making any of my money. So they nudge, encouraging me to get into trouble to their benefit. After all, I don’t come anywhere near the limit, and yet … they keep raising it. I assume they’re hoping I some day decide to charge a pony, or something, and they finally make themselves some scratch at my expense. These companies are NOT our friends.

  16. sporesdeezeez says:

    thrillhouse sez:

    Sounds like you took one of those old ‘business finance’ classes in college. Too bad most of the professors who teach that garbage are broke themselves.

    Where do you get this from? That species of fallacy is called argumentum ad hominem, and sorry, but yes, that knowledge did come from college. Of course, I bet you’d say rhetoric professors can’t argue their way out of a paper bag, right?

    Debt as an investment? Please – my investments make money. Its always been a bad idea to finance something going down in value (like a car or computer) in personal finance, why would calling it a business expense suddenly make that ok? I know, I know, its making money for you. Well not really. You’re making the money, it is just a piece of equipment.

    I cannot accept the assertion that there aren’t some, if not many, business opportunities that require certain tools or knowledge in order to be pursued. Go all the way back to your first job – say it was a paper route. In most cases, paper delivery requires at least a bicycle! Carpenters need hammers, mechanics need tools. For my example, in terms of e-business, you cannot conduct such business without use of some computer, which whether bought or rented, will not be free.

    You’ve still taken on all of the risk, you’re still needlessly cutting into your profit to pay finance charges, and you’re still showing imaturity [sic]. Be patient, save up the money, and pay for it in cash.

    What about opportunity cost? While you’re still working your paper route at $20 a day to buy a computer to start your web design business, I just borrowed $1500 to get a computer and am making $50+ an hour from all the clients you were never able to pursue.

    You can still take the depreciation on your taxes. A very high percentage of new businesses fail in the first year, why on earth would you want to add unneeded stress and payments to the equation.

    Because I want a substantial revenue stream. Just because you’ve put your business opportunities off for years to enter into them debt-free doesn’t mean you’ve done better. Patience is a virtue, but life is short. Are you saving for retirement with that paper route?

    All that said, whether you use a credit card or a small business loan, paying the minimum payments is always a bad idea, because minimum payments mean maximum interest. The article is definitely correct.

    The question was asked if there was any such thing as good debt. You and I have different answers, and I think you’re a bit of a hardliner, but then you think I’m immature. I’m happy to disagree, but I wish you could do it without calling me immature, and my professors broke – especially when you don’t know any of us from Adam.

  17. thrillhouse says:

    sporesdeezeez –
    Studies have shown that a high percentage of finance professors are in fact broke themselves (or at least they were when the study was done). Mostly because of stupid concepts like OPM. Much like the studies show high incidence of eating disorders amoung dietary students. Its all hard to believe, but difficult to argue with fact.

    And I don’t have to call you immature, you’re actions speak for themselves. A sign of maturity is learning to delay pleasure. Seriously, web design is great and all, but it can be done on a $300 PC. Then as you business grows, and if it grows, you can easily and eventually move up in machine. Heck, I did pleanty of freelance work on a 5 year old, home-built machine. It sure wasn’t pretty, but the one I bought a year later with cash sure is nice. Not financing a computer did not keep me out of the market.

    Sure, many businesses require some sort of training or equipment. And it can all be paid for with cash. Equipment can be bought second-hand, knowledge can be gained thru apprenticeships. You wanna talk about opportunity cost? What about the opportuinty you’ve missed out on by overspending on your machine? And I’m sure there are much better things that could be done with the money you are paying out in finance charges. Its fine to disagree, I just wish you would do so with spewing bad advice that you’ve convinced yourself is acceptable.

  18. sporesdeezeez says:

    Its all hard to believe, but difficult to argue with fact.

    Evidently. You are having a hard time arguing with “fact” – you haven’t presented one yet, even though you seem to be claiming a monopoly on them. Let’s see a link to a study, since “studies have shown.”

    And I don’t have to call you immature, you’re [sic] actions speak for themselves.

    What’s with all this hostility? Seriously? You’re being a hater. Aren’t we all on the same side here? Do you go through life talking to people like that, or are you just taking advantage of the anonymity?

    Its fine to disagree, I just wish you would do so with spewing bad advice that you’ve convinced yourself is acceptable.

    I think the problems with you saying this are self-evident. I just wanted to highlight it. Pot and kettle, friend. We’re both self-righteous, but now you’re being holier-than-thou, too. Now go ahead and have the last word – this conversation has already entailed enough opportunity cost for me.

  19. NeoteriX: “Out of curiosity, is there any reason one wouldn’t want to get out of “debt” as soon as they could pay for it?”

    Yes. I have fixed-rate student loan debt at just above 2% interest. I could pay that off faster, or I could put that extra money into investments earning more than 2%. Or into my emergency fund so that if my car breaks down I won’t have to put $1200 of repairs on my credit card and get stuck with 17% interest!

    For the average consumer, there’s “good debt” like mortgages and student loan debt, and then there’s “bad debt” like credit card debts and car loans. With “good debts” there are often good reasons not to rush to full repayment, such as a fixed 2% rate. :)

    (Although in point of fact I round up both my mortgage and my student loans to the next $100 every month so my payment drops a few dollars every year. If I were super-finance-woman I’d let those debts ride paying only the required payment while investing even that extra $40. But I feel better paying off a bit extra.)

  20. thrillhouse says:

    Thanks, sporesdeezeez. But here’s what you don’t understand: Once you’ve seen the other side, you’ll never go back. We’ve all been stupid with money, even immature at times. But once you’ve been enlightened, once you can admit your own stupidity, you can move past it.

    So you can see why I’m not so receptive to 1980’s ‘creative’ finance concepts like “good debt vs. bad debt”. It’s all bad, people just find ways to justify it. And as much as you have the right to say that is fine and dandy, I have the right to expose those myths. Sorry if that ruffles your feathers.

    Oh, and don’t worry, you totally won the spelling bee.

  21. sporesdeezeez says:

    You know what, I’m sorry. I really am. I looked over your comments and you’ve talked about your own bad experiences with debt. Debt clearly strikes a chord with you, and I should have seen that coming.

    Still, it kinda sucks that you want to call my opinion immature and stupid. Or anybody’s, for that matter. It’s like…don’t worry, you totally won the shouting contest.

    But I see where it’s coming from, now that I’ve looked up Dave Ramsey. You’re in a debt cult. I’m not arguing with you about economics, this argument is downright religious. Your way comes from the “biblically-based” Lampo Group, Inc. Dave Ramsey tells you to pay off your smallest debts before your debts at high interest rates, not because it makes a lick of economical sense, but because “you need some quick wins in order to stay pumped enough” to pay off your debt.

    I guess that’s biblically based? I didn’t realize people practiced touchy-feely economics at all, let alone in the time of the shekel. Is that where your disdain for academia comes from? I thought this was limited to theories of origins, but apparently there are fiscal heretics, too!

    Nice plug up there, man. At “Financial Peace” University, the seminal question is “What could the People of God do for the Kingdom of God if they were DEBT FREE?” I ask you, friends: What Would Jesus Deposit?

    So clearly you’re going to fight this fight with fundamentalist fervor. Having had that realization, I really give up this time. Your “last word” was more worthless ad hominem, so I had to respond…but now I realize I *cannot* win this argument – you will never concede an inch of ground because this is your faith.

    Remember, you spendthrifts out there – Jesus saves!

  22. sporesdeezeez says:

    Whoops, I forgot the link:

    http://www.daveramsey.com/etc/cms/church_programs_234.html

    Come and join the Debt Free Church! You, too, can plug our insane wares on Consumerist!

  23. Michael says:

    I’ve had a traditional Amex card for quite some time, and although I’ve always been fairly responsible with my finances I still appreciate that the balance is due in full each month.

    Of course, now they also offer revolving credit, but I haven’t seen any reason to switch over.

    The one downside of Amex for me was when I discovered that due to having no set limit, the number they report to the credit bureaus for your limit is that of your historical highest balance. If the largest balance you’ve ever had on it was, say, $500, then $500 is going to show as the limit on your report. So then if you charge $475, your account will show 95% utilization. That may be okay once in a while, but if you’re like me and you always charge about the same amount each billing period, your credit score will take a dive.

    Since I like Amex otherwise, I stuck some rather large purchases on there one month, paid them off when the bill came, and breathed a sigh of relief as my credit score recovered.

  24. TWinter says:

    I really hate the whole good debt vs. bad debt thing. I would much rather see something along the lines of tolerable debt, unpleasant debt, bad debt, really bad debt, horrible debt.

    By thinking of some debt as “good” people trick themselves into making stupid decisions. Lets take student loan debt for example:
    Student #1 borrows 10k to get a nursing degree from a local state school. The market for nurses is very good and the pay is good enough to make repayment pretty easy. This is tolerable debt in my book
    Student #2 borrows 80k to get a B.A. in Art History from some small private college no one ever heard of. Student #2 is going to have more problems finding a job, and the pay is probably going to start out low making repayment difficult. I would call this really bad or perhaps even horrible debt.

    You can do the same thing with mortgage debt and people who buy houses that are within their means and beyond their means.

  25. Amy Alkon says:

    I just don’t understand…maybe somebody gets sick and needs a bit of credit card float for a few months, but when I don’t have money, I just don’t spend it. If you can’t afford to have three kids, have one. I mean, how hard is this to figure out? Also, while I pay my assistant as well as I can, I also try to save money so I won’t get stuck if I have a financial loss. I’m not a financial genius, but I’d rather be debt-free than have a new whatever. And I have great credit from paying my card in full every month and never ever being late. I also pay more than what’s due on my car. If and when I buy a house, I’m going to have a good rate, I’d imagine.

  26. acissej says:

    Amy, what a happy little world you live in. People spend more money than they have for many reasons, and it’s not just greed. It’s because they really want to buy their 6 yr. old daughter a bike for her birthday because that’s all she wants in the world and they can’t give her all the things they wish they could, because they ran over a pothole and messed up the alignment on their car and broke an axle, but still have to drive to work, their fridge stopped working, a niece is going to be the first one in her family to graduate and it would mean the world to her if you could fly and be there, best friend’s weddings, sick pets.. I could go on and on. Life happens and there are times when the choice to put in on the credit, rack up debt and deal with it later seems like the only option

  27. chiggers says:

    Word. Get the debt payments over with, folks. I started a DMP 2 1/2 years ago on a starting credit card debt of $40K. I’m paying nearly 1 grand a month and will have it paid off in 1 1/2 years. It sucks. We spend money on nothing except for food, utilities and the roof over our heads. The sacrifices are immense, but it will be worth it.