What happens if I only pay the minimum on my credit card?

Two real examples of minimum payments#

Cambridge Credit Counseling has published two worked examples showing what happens when a credit card balance is paid off using only the minimum payment each month.

How the $1,000 example adds up

Say you buy a new TV for $1,000 with a credit card that has an APR of 18%, and the minimum payment is 2% of the principal balance: $20 ($1,000 x 2% = $20). Card issuers typically calculate interest on a monthly basis by dividing the APR by 12, so an 18% APR is a monthly interest rate of 1.5%. On the $1,000 balance that is a monthly interest payment of $15, which leaves only $5 of the $20 minimum payment actually going towards paying down the debt.

Making no other purchases with the card and paying just the minimum every month, it would take about 151 months to pay off this TV, a little over 12 years, and you would pay $1,396 in interest. The $1,000 TV would cost a total of $2,396.

Using the same $1,000 purchase at an 18% APR, paying $100 per month would pay the balance in full in 11 months, with $91.62 in interest charges.

All of these figures, such as the APR and the percentage of the balance used as a minimum payment, will be different for every credit card issuer, so it’s important that you understand the terms of your own credit card.

Why the cost grows so fast#

Credit card interest is compounded, which means interest is added to the balance and then more interest is charged on that new, larger balance if it is not paid off each month. Making only the minimum monthly payment takes the longest possible time to pay off an account, and it often results in paying much more than the amount originally borrowed.

Credit Card Interest Rates: Think Before You Swipe!#

Many times when someone is choosing whether or not to purchase an item with their credit card, they decide whether it fits into their monthly budget by determining the amount of the minimum monthly payment for that purchase. You should never construct your credit card spending decisions on what you think your minimum payment will be. Usually, the minimum monthly payment is 2-4% of the principal balance, depending on the banking institution, and interest rates can make your purchases much more expensive than you bargained for.

Credit card interest rates vary depending on your credit profile. Your APR is the amount of interest that you will annually pay on your balance. If you pay off your balances in full each month, the APR doesn’t make all that much of a difference. The faster you pay off your balances, the less money you’ll spend on interest.

Perhaps the most important thing to think about is whether or not you can realistically afford the added expense. The easiest way to determine this is to look at your household budget. Do you have expendable income? Can you safely take on another monthly expense and still meet your other obligations? If you’re not sure, or if you don’t have a budget yet, it’s time to sit down and create one.

A partial extra payment still helps#

Paying down part of a credit card balance reduces the amount of debt that interest is charged on, so even a partial payment above the minimum lowers future interest costs.

The debt snowball method#

The debt snowball method is a way to pay off credit cards or loans faster. It works by putting more than the minimum payment toward the debt with the lowest balance first, while paying only the minimum on the rest. Once that debt is paid, the process repeats with the next lowest balance until all debts are paid.

How a Cambridge Credit Counseling debt management plan can lower interest#

One of the most significant benefits creditors typically extend to clients of a consumer credit counseling agency such as Cambridge Credit Counseling is a reduction in credit card interest rates. A consumer enrolling in a Cambridge Credit Counseling debt management plan does not have to enroll every card, and commonly keeps the card with the highest available credit limit outside the plan.

What to do next#

Cambridge Credit Counseling offers credit counseling as a free service to consumers who are having difficulty paying credit card and other unsecured bills. To talk with a counselor about your situation, call Cambridge Credit Counseling at (800) 235-1407.