Understand Why Minimum Payments Trap You in a Cycle of Perpetual Debt

Key Takeaways
  • Credit card accounts that charge double digit interest only require a minimum payment that barely covers the monthly interest charges, leaving very little left to reduce the principal balance.
  • Credit card issuers typically only require a payment of 1 to 3% of the outstanding balance, which does not allow for substantial debt repayment using the minimum payment method.
  • It could take you over 30 years to eliminate your credit card debt making only the minimum payment.

As you scan your mail, it’s easy to quickly pick up or click on the important items in which to open. Yes, bills always make the list. You glance at each bill, look at the “amount due,” and schedule your payment. But the data is clear, more Americans than ever are paying the minimum due and problems are mounting as months pass making the same minimum payment. American today hold more unsecured credit card debt than ever before.  

Using this common bill paying process of only making the minimum monthly payment each month on your credit card accounts could leave you paying thousands of dollars more in interest payments on your credit card debt. Here’s why.

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What is the Minimum Payment of Your Credit Card Bill?

On your monthly credit card statement, the “amount due” is the minimum payment or the least amount you can pay to keep the account current. 

The challenge with a minimum payment on credit cards is that unlike most debts, that is not the amount you should pay if you want to ‘go in the right direction’. Doing so could extend the debt for decades and result in paying thousands of dollars in extra interest payments.  

How Credit Card Companies Calculate the Minimum Payment:

Credit card companies typically use one of two formulas to determine how much you will owe on your outstanding credit card balances each month. These are a flat percentage or a flat percentage plus interest and fees.  

Flat Percentage: Credit unions and credit cards targeting subprime borrowers tend to favor the flat percentage rate. In this case, you will pay anywhere between 1 and 3% of the average daily balance as your minimum payment. 

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Using the flat percentage calculation, if the company charged 2% of the balance to calculate your minimum payment, you would pay a minimum of $50 on a balance of $2,500. 

Flat percentage plus fees and interest. Major credit card issuing banks tend to use this calculation to determine the minimum credit card payment. In this case, the company may use a lower percentage and then add the interest charges, plus any fees, to the payment.

For example, if you carry a credit card balance of $2,500, charging 15% in interest, a bank using a 1% flat fee plus interest, would require you to pay $56.25 ($31.25 in interest plus the $25 flat interest fee.)

Making a payment of 1 to 3% of the outstanding balance can push credit card payments out to 30 years or more when you have high outstanding balances.   

Protections Offered in the CARD Act

In 2009, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act became law. It was written to protect consumers from the predatory practices of credit card companies. One of the key changes in the law now requires credit card companies to list the time it will take to pay off your debt if you only pay the minimum payment required each month. The schedule also includes the amount you can pay to eliminate the debt in three years, along with the total interest paid in both scenarios.  

The statement information illustrates the high cost of making only a minimum payment on credit card debt. 

For instance, an account balance of $8,000 (the average consumer credit card balance), charging 17.41% (the average interest rate charged), would take 23 years to pay off making only the minimum payment. Over that time, you would pay around $11,000 in interest. 


Paying off credit card debt requires more discipline than traditional loans because of the minimum payment option. Taking the time to figure out the best way to retire your debts and implementing a strategic plan could save you thousands of dollars in interest payments

  • What is the minimum payment debt trap?

    Credit cards are a revolving line of credit, where the monthly payment changes from month to month depending on your balance. You can pay any amount you want, provided you make at least a minimum payment due. Companies dupe you into staying in debt by only requiring an interest payment, plus a few dollars in principal leaving you trapped in debt for decades. 

  • How can I break out of the debt trap I am in?

    Without proactive measures the debt cycle can last your entire lifetime. Especially if the bulk of your bills come from credit card bills. Companies charge you high rates of interest and set up a payment structure designed to keep you in debt. The most efficient way to get out of debt is through a debt-relief option that will guide you through the payoff process. 

  • How are credit card monthly payments calculated?

    Credit card companies typically charge between 1 and 3% of the outstanding balance. They might charge a flat percentage or a flat percentage plus fees and interest. Both methods limit your principal reduction if you only make the minimum payment.