It's like running on a financial treadmill. Anybody with a credit card balance knows that making only the minimum payments takes a lot of your money but gets you nowhere. If you had a $5,000 balance on a card with an 18.9% interest rate and your minimum payment was $200 each month, it would take you 11 years and five months to pay the entire balance. By the time you make the last payment, you will have paid $8,109.
To make it even more depressing, let's say that you purchased a beautiful bedroom suite for $5,000. Once you pay the credit card balance making only the minimum payments, you will have paid 62% more for that bedroom suite while watching the value of your furniture drop with each passing year. Will you still own that furniture 11 years from now? Why does it work out to be so customer unfriendly? It's because the credit card companies employ some tricks to keep you paying more.

SEE: How Credit Card Delinquency Works

According to, your minimum payment is calculated as a percentage of your total balance. This includes the interest that is added to the balance each month. In our example above, the minimum payment of $200 is based on the credit card company requiring no less than 4% of your daily balance each month. Basing it on a percentage instead of a fixed amount works in the credit card company's favor because you keep a higher balance allowing the credit card company to charge more interest. Once you pay your balance down to $2,500, your payment is now only $100. When you reach $1,000, you're only required to pay $40. What if credit cards worked like mortgages and you paid a set amount regardless of your balance? If you were to pay $200 per month until the balance was paid, it would take you 32 months instead of 137 months and you would pay nearly 50% less in total interest.

Lower Percentage
Four percent of the balance is steep, and likely too much for some people, which is why many card companies only require 2%. If you only pay 2% each month, it will take you more than 30 years to pay off the balance and you'll end up paying more than $19,000 in total payments. That makes your $5,000 bedroom suite 280% more expensive. If there was a price tag of $19,000 on the furniture, would you still have bought it?

The Best Strategy
Of course, the best strategy is to pay as much as possible in the shortest amount of time. If you have money in an investment account that isn't retirement related, pay off your credit cards before investing. Next, if you're only able to pay the minimum amount right now, continue paying the same amount as your balance decreases. Finally, if you have multiple credit cards, make minimum payments on all cards except for the card with the highest interest rate. Pay the maximum possible on that card until it's paid off. Then, go to the card with the next highest interest rate and add the amount you were paying on the last card to the current card. This will allow you to pay a higher amount on each card as one is paid off. To make it even more simple, don't decrease your total monthly credit card payment until all of your cards are paid off.

SEE: Worst Case Scenario For Credit Card Debt

The Bottom Line
Paying the minimum balance might keep your credit report in good shape, but it will do little to help pay down the balance on your credit card. Paying hundreds or thousands per year in interest is a financial emergency that you should remedy quickly. Giving up some of your non-essential spending in order to pay off the debt is the best investment you can make.

Related Articles
  1. Credit & Loans

    Walmart MoneyCard Vs. Walmart Credit Card

    Discover how the Walmart MoneyCard and the Walmart credit card have different benefits that may influence your decision on which one to choose.
  2. Savings

    These 10 Habits Will Help You Reach Financial Freedom

    Learn 10 key habits for achieving financial freedom, including smart budgeting, staying abreast of new tax deductions and the importance of proper maintenance.
  3. Credit & Loans

    Have Bad Credit? 6 Ways to a Personal Loan Anyway

    It'll cost you more, but borrowing is definitely doable. Here's how to proceed.
  4. Credit & Loans

    How To Minimize Holiday Debt Before It Happens

    Holiday expenses can drown you in debt. Find out how to avoid this festive spending hangover.
  5. Credit & Loans

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  6. Credit & Loans

    These Are The Best Credit Cards For Making Balance Transfers

    Handled correctly – and very carefully – a promotional credit card balance transfer offer can save you money. Here are some of the best deals around now.
  7. Investing

    How to Raise Your Credit Score Quickly

    Here are the best tips for raising your credit score quickly.
  8. Credit & Loans

    Getting Your Name Off A Cosigned Loan

    If you want to remove your name from someone else’s loan, there are four key ways to do it.
  9. Credit & Loans

    How Credit Card Delinquency Works

    When you pay less than the minimum monthly payment on your credit cards, you become delinquent.
  10. Credit & Loans

    Try This Home-Equity-Line-of-Credit Hybrid

    This product is essentially a home-equity loan and home equity line of credit (HELOC) hybrid, and it has its own quirks, benefits and drawbacks.
  1. Does the Walmart credit card have an annual fee?

    The Walmart credit card does not charge annual fees to its cardholders. It does, however, have other fees associated with ... Read Full Answer >>
  2. How do NetSpend cards work?

    NetSpend prepaid MasterCard and Visa cards are popular prepaid debit cards requiring no minimum balance and no credit check. ... Read Full Answer >>
  3. Are FHA loans fixed?

    An FHA loan is a mortgage loan backed by the government that offers more flexible lending requirements than those of conventional ... Read Full Answer >>
  4. Can the Best Buy credit card be used anywhere?

    The Best Buy credit card can only be used in Best Buy stores and when making purchases online through the Best Buy website. ... Read Full Answer >>
  5. How does the Best Buy credit card work?

    Best Buy has two credit cards available. One can only be used through Best Buy and its affiliates, and the other can be used ... Read Full Answer >>
  6. Do pharmacies take CareCredit?

    The CareCredit card is accepted only at select Rite Aid pharmacy stores in the states of New York, Pennsylvania and Maryland. ... Read Full Answer >>

You May Also Like

Trading Center