Published in: Credit Cards | Nov. 25, 2019

12% of Americans Trap Themselves in This Dangerous Credit Card Cycle

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You definitely don’t want to be part of that statistic.

Credit cards can be a useful financial tool when used properly. It's when consumers mismanage them that trouble ensues. 

Unfortunately, 12% of Americans are making a major mistake with their credit cards: They only pay the minimum required month after month, according to Northwestern Mutual's 2019 Planning & Progress Study. As such, they're not actually putting any money toward the principal amount they owe. Rather, they're simply covering the interest on that principal, thereby trapping themselves in a cycle where they continue to accrue -- you guessed it -- more interest. 

A man sitting in front of a laptop with his head resting in his hand.

Image source: Getty Images

If you routinely only make your minimum credit card payment, you are effectively throwing money away while doing your finances a major disservice. Though you’re not actually hurting your credit score (provided you come up with those minimum payments on time), you’re extending the life of your debt, and that’s not good. 

Imagine you have a $1,000 credit card balance with a 17% interest rate attached to it. If you're only required to make a minimum monthly payment equal to 3% of your outstanding balance (meaning, a $30 minimum initially, and slightly lower minimums to follow), you'll end up throwing out almost $452 on interest -- that's close to half the balance you started with!

A better bet? Start paying down your existing credit card balances to break free from that trap. Here's how.

1. Get on a strict budget

Some people make only their minimum credit card payments because their finances don't allow them to do any better. If that describes your situation, start cutting back on spending to free up money to pay down your debt. Set up a budget that eliminates the bulk of your non-essential spending (think movies, rideshares, takeout orders, and the like) for a period of time. This will help you bust out of debt faster, so map out your expenses on a spreadsheet and see what wiggle room it buys you.

2. Secure an additional source of income

If you don't bring in enough money from your main job to make more than your minimum credit card payment month after month, a second job may well help. That could mean waiting tables on weekends and evenings, pet-sitting twice a month, or designing websites in your spare time. It doesn't matter what work you do as long as you bring in extra money to pay off your outstanding debt.

3. Make your debt more affordable

The lower the interest rate on your credit card debt, the easier it'll be to pay off what you owe. It pays to ask your credit card issuers to lower your current interest rates, which they may be amenable to if your accounts are in good standing (which should be the case if you routinely make those minimum payments on time). But if they say no, you can look into a balance transfer, which allows you to move your existing balances onto a single credit card with a lower interest rate. Some balance transfer cards even offer an introductory period where you pay no interest at all on the amount you transfer. 

Making only the minimum payment on your credit card each month is a good way to ensure that you stay in debt for the long haul. Rather than resign yourself to that fate, take steps to shake that debt -- and stop throwing away money on interest.

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