Making Only Minimum Payments Is A Debt Death Sentence

Making only minimum payments on credit cards can indeed extend the repayment period significantly, especially with high-interest rates. Let’s break down an example to illustrate how long it would take to pay off a $20,000 credit card debt at a 29% annual interest rate by making only minimum payments.

Example Scenario:

• Credit Card Debt: $20,000
• Annual Interest Rate (APR): 29%
• Minimum Payment: Typically, the minimum payment is either a fixed amount or a percentage of the current balance, whichever is higher. For this example, let’s assume the minimum payment is calculated as the greater of $25 or 2% of the balance.

Calculating the Minimum Payment:

• Initial minimum payment: 2% of $20,000 = $400

As the balance decreases, the 2% will also decrease, but for simplicity, let’s calculate the first few steps with a static minimum payment based on the initial balance.

Interest Accrued Monthly:

• Monthly interest rate = Annual interest rate / 12 = 29% / 12 = 2.42% per month
• Initial monthly interest: $20,000 x 2.42% = $484

Month 1:

• Starting balance: $20,000
• Interest for the month: $484
• Payment made: $400
• Principal paid: $400 – $484 = -$84 (negative because you’re actually going deeper into debt)
• Ending balance: $20,084

Month 2:

• Starting balance: $20,084
• Interest for the month: $20,084 x 2.42% ≈ $486
• Payment made: $400 (since 2% of the balance is now less than $400, the payment is still $400)
• Principal paid: $400 – $486 = -$86
• Ending balance: $20,170

As you can see, in just two months, the balance has increased despite making payments, because the minimum payment doesn’t cover the interest accrued each month. Over time, as the balance decreases, the payments will start to cover more of the principal, but it will take a very long time to pay off the debt entirely.

Long-Term Impact:

If you continue to make only the minimum payment, it could take decades to pay off the $20,000 debt, and you would pay a substantial amount in interest—potentially far exceeding the original $20,000.

This example demonstrates the pitfalls of making only minimum payments on high-interest credit card debt. It’s a cycle that can keep consumers in debt for many years, costing them significantly more than the original amount borrowed. To avoid this, it’s advisable to pay more than the minimum whenever possible and consider strategies like debt consolidation or balance transfers to lower interest rates, if feasible. For a precise calculation over the entire repayment period, using a credit card repayment calculator or consulting with a financial advisor would provide a detailed outlook on the repayment timeline and total interest paid.

 

Minimum Payments