Urban Legend: minimum payment will easily payoff balance over time

the plastic effectUrban Legend Number 23: I have made a large number of purchases on my credit card and am close to my credit limit. I am making only the minimum payment each month. I will easily be able to pay off my credit card balance over time by making just the minimum payment.

The Reality: False.
Making only a minimum payment each month is a serious financial debt trap that is a pitfall for a large number of credit card holders. It becomes a financial death trap for many.

Paying only a minimum payment can keep you in debt for a very, very, long time. If you pay only a minimum payment and continue to use your credit card, you may never be able to pay off your balance because of your interest charges………

Polly’s Pearls of Wisdom: The CARD Act of 2009 now requires credit card issuers to clearly print late payment warnings, minimum payment warnings, and information about credit counseling on the front of your credit card statement.

The late payment warning section includes the late fees (e.g., $35.00 or more) and your penalty APR (e.g., 29 percent or more). The minimum payment warning section includes a table that indicates how many months or years it will take you to pay off your balance if you make only the minimum payment and what your estimated total with the interest will be.

Using the example of $5,000 balance, when the card is not used for any additional purchases and no late payments are made, the minimum payment table will look something like what is illustrated in Table 7.


Table 7 Monthly Payment Calculator

No additional charges on card

& pay each month

  Will pay off balance

          in about

 Estimated total 


Minimum payment 20 years, 8 months $10,175
$100/month 6 years, 1 month $7,241
$150/month 3 years, 6 months $6,237
$200/mont 2 years, 6 months $5,863


Many of these tables also include additional rows, which include values for more than the minimum payment (e.g., values for paying double or triple the minimum payment). The content of the additional rows depend on the credit card issuer.

If you are able to pay double or triple the minimum payment, or if you can work a fixed payment into your budget, you could reduce the time to pay off your balance by a large number of years — even decades — and save yourself several thousands to tens of thousands of dollars in interest charges.

For example, (as shown in Table 7) for the $5,000 balance example, if you paid $200 every month as a fixed payment (instead of the minimum payment of $100 in the beginning and smaller minimum payments each month), you would pay off your credit card balance in about 2 years and 6 months and your total payments would be about $5,863. This is a savings in time of over 18 years and about $4,312 ($10,175 − $5,863) in interest charges!

Even if you can only budget for a fixed payment of $100 per month, your payment time will be reduced by over 14 years, and you will save $2,935 in interest charges.

Making only a minimum payment will likely lower your credit score because it affects your credit utilization (30 percent of your credit score).

The impact of credit utilization on your credit score varies depending on your credit history (see Urban Legend 7).

The impact of a single missed payment on your credit score (payment history is 35 percent of your credit score) varies depending on your credit history (see Urban Legend 8).

If all you can make is your minimum payment, consider transferring your balance to another credit card issuer who is offering a zero percent interest rate (see Urban Legend 9). Such a transfer can save you a significant amount of money in interest charges.

Free credit card minimum payment calculators and other credit card related and interest calculators can be found online at websites such as Bank Rate , Bills and Daily Finance .

If you generate a large credit card balance and cannot make the minimum payments, you should think about credit counseling (see Urban Legend 24). Credit card statements also list a toll-free number for credit counseling services at (866)797-2885. In some situations, you may have to consider declaring bankruptcy (see Urban Legend 14).

Plastic Reactions:

• How did you feel when you realized that making just a minimum payment on your credit card balance can take years, or even decades, to completely pay off your debt?
• Have you ever been in a situation in which you paid just the minimum amount due on your credit card balance? How did that decision make you feel?
• Have you ever been in a situation in which you paid off your credit card balance in full? What emotions did you experience then?
• How did you feel when you realized that missing a payment or making a late payment may put you in a situation in which you may never be able to pay off your credit card balance?
• Have you ever missed a payment or made a late payment on a credit card balance? How did that feel?
• After reading the information about how much time and money can be saved by making a larger payment on your account, will you re-think your credit card payment strategy?

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The Arizona Daily Independent has received permission to reprint portions of a timely new book “The Plastic Effect” focused on the urban myths of credit cards and their usage written by Polly A. Bauer, CPCS and Stephen Lesavich PhD JD. Future issues of the ADI will feature “Polly’s Pearls” included in each Urban Legend Myth. “The Plastic Effect” is Copyright by Coconut Avenue, Inc. All rights reserved. No unauthorized reproduction or duplication is permitted without written permission of Coconut Avenue, Inc.

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