Why Making Minimum Payments to Pay Off Credit Card Debt Ensures You Will Die Broke

Key Takeaways
  • Making just the minimum payment required each month on credit card debt will maximize the amount of interest you pay to creditors.
  • The combination of high-interest charges and low monthly payments is a toxic combination that will keep you indebted for a longer period than it takes to pay off your mortgage.
  • Creditors want you to make minimum payments even though they know it’s terrible for your financial wellbeing.
  • Continuing to pay just the minimum payments on your credit card debt robs you capital you could use to fund your retirement or pay for your children’s education.

Another credit card bill arrives, and you moan when you see the balance. Then you look at the minimum payment due and think, “I can afford this. I just have to pay $200 on my $10,000 bill.”

What you don’t see is the interest charge of $180, meaning you are basically treating your credit card debt like an interest-only loan. The only difference is that the interest rate is 19% or even 25%, which will keep you in debt likely longer than you will live to pay off the balances.

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Whether you pay bills based on a formal budget or as they come in, it is easy to get stuck on autopilot, paying the minimum amount on each credit card every month. This habit could result in your credit card debt, surviving longer than you.

It doesn’t have to be that way. Here is a closer look at how credit card companies plan to enslave you with a debt burden for the rest of your life and what you can do today to break that cycle of perpetual debt.

The High-Interest Low Payment Death Trap

Credit card debt is easy to obtain and hard to get rid of because lenders only require you to pay enough to cover the interest and a few dollars against the principal balance. The strategy lures you into believing you can afford purchases you do not have enough money to buy without credit.

Creditcards.com reported than in September of 2020, the average credit card offer had an interest rate of 19.67%. Paying only the minimum payment on a $10,000 balance at 19.67% will cost you $47,125.48 in total payments and take 885 months or 73.75 years to pay the balance off entirely, according to the Bank Rate credit card calculator.

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Paying off credit card debt is a challenge because it requires a great deal of discipline. You must voluntarily pay extra on your account every month for years to eliminate the liability.

The Snare of Compound Interest

How can it take over 73 years to get rid of $10,000 in credit card debt when it will only take 30 years to pay off your $400,000 home loan?

The answer is a combination of the monthly payment, the interest rate, and how often interest compounds. Credit card companies calculate your interest daily rather than monthly, like your home mortgage. The calculation method means not only are you paying double-digit interest rates, but you are paying interest on the interest every day you have an outstanding balance.

Home mortgages also have the benefit of low-interest rates and larger monthly payments that require you to pay off the debt sooner.

High-Interest Debt Siphons Money from Other Priorities

A consumer with $30,000 or more in debt could be paying over $1,000 each month in interest. When so much of your paycheck goes to maintaining debt, there is little left for other financial priorities. You need money for your emergency fund, retirement savings, and setting aside money to either pay off student loan debt or to fund your children’s college accounts.

If making even the minimum payment is a struggle, you might need assistance from a professional. Eliminating credit card debt by negotiating outstanding balances can result in paying significantly less than the full balance and have you debt-free in five years or less.

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