Why Minimum Payments On Credit Cards Are Evil

Minimum payments on credit cards are an evil thing.  If you're actually reading this blog, then chances are you are one of the many people (including myself) who just make the minimum monthly payment.  It's amazing, because in reality, unless you have a very low balance card with a low interest rate, you aren't going to pay off your card anytime soon by making the minimum payment.

How Is the Minimum Payment Calculated?

Every credit card company is different, but the majority of them will charge you at least $35.  If you have a larger balance, the minimum payment will consist of at least 1% of the balance and the interest, and any fees such as late fee.

Let's See An Example:


You have a First Financial Bank card with a balance of $8,000, and interest rate of 30%.  Your monthly minimum payment is $280.  Although this looks like a considerable payment, in reality if you continue to only make the minimum payments, and you don't put any additional charges on the card, it's gonna take a long time for the balance to get paid off.

Let's break down where your minimum payment goes.

Because of the high interest rate (30%) you are paying $200 towards interest.  This leaves $80.00 applied to the balance.  If you just make the minimum monthly payments for one year on this card, you will pay the roughly bank $3180.   Of this, nearly $2075 of it is interest.  That means, for all of your payments, your balance was reduced by a mere  $1105.  

Can you see why making minimum payments is absolutely horrible?  Most people who are having credit issues can't really afford to pay more than the minimum, but at the same time, many people don't realize that even by adding a few dollars to their minimum payment makes a huge difference.

Remember, the credit card companies are already getting their interest on the balance.  They want you to make minimum payments so that they can collect the interest from you for years.  When you pay more than your minimum payment, it may look great on your credit report, but it looks even better on your balance, because 100% of any amount you pay on a credit card over the minimum payment will go towards the balance on the account.

Don't fall for the minimum payment trick!  Even a few extra dollars with your payment will help you out!