by Lyle Daly | Aug. 9, 2019
While there are varying opinions about what qualifies as "good debt" and "bad debt," there's one thing that just about everyone agrees on -- credit card debt is bad debt. Interest rates make it costly to carry a balance on your credit card, and since consumers can continue using their cards even when in debt, they often dig themselves into an increasingly deeper hole.
If you currently have credit card debt, your repayment strategy makes a significant difference in how much that debt costs you overall. And this is an area where many consumers make a big mistake, because they only pay the minimum amount when their bill comes due.
In our research on the psychological cost of debt, we asked consumers with credit card debt about their monthly payment amounts. Here's what we found (percentages rounded to the nearest whole number):
That's a staggering 43% of consumers who were only paying the minimum or less.
Paying less than the minimum is the worst thing you can do, because that's considered a missed payment. Your credit card company can then charge you a late fee, and once your payment is 30 days or more past due, it can negatively impact your credit score.
Although you avoid those two consequences by making your minimum payment, there's a serious problem with this option as well.
The reason why paying the minimum on your credit card is so bad for you financially is that it takes much longer to pay off your balance, which also means you end up paying much more interest. It's easiest to demonstrate this is with an example.
The table below lists how long it will take you to pay off a few different credit card balances and how much interest you'll pay if you only make minimum payments. Note that these calculations are assuming a credit card with an APR of 18%, which is close to the national average, and a minimum payment that's 2% of the balance.
|Starting balance||Time to pay off||Interest paid|
|$1,000||12 years, 7 months||$1,396.76|
|$5,000||39 years, 4 months||$13,396.53|
|$10,000||50 years, 10 months||$28,396.72|
Data source: Author's calculations
With every example, you'll end up paying more than double your original balance in interest and spend over a decade with credit card debt.
This also assumes you don't make any more charges with your credit card. If you do, the time to pay off your debt and the total interest paid will both increase.
When you're in credit card debt, the most important thing to do is to pay more than the minimum. In most cases, you should be putting all the extra money you have each month towards your credit card payments.
What if minimum payments are all you can manage? The hard truth is that you'll need to come up with more cash to make progress on your debt. This may mean finding a way to pick up some side income, cutting every non-essential expense that you have, or selling anything you don't need.
Once you're paying more than the minimum on your credit card debt, there are a few different strategies you can consider that could help you pay off your debt more quickly.
With a good credit score, you could qualify for a balance transfer card with a 0% intro APR. You can then transfer your credit card balances to that card and avoid any interest charges until the end of the intro period.
Although many balance transfer cards include a fee (often 3%) for each transfer you do, they can still save you a lot of money on interest, especially since several have intro periods of over one year. Just keep in mind that the APR will get much higher after the intro period ends.
Another option available to those with good credit is a personal loan that you use to pay off all your credit card debt. Since personal loans usually have much lower interest rates than credit cards, you can save money this way. You'll also have a set loan term with fixed payment amounts, which could help you stay on track with repaying your debt.
If you have debt spread across multiple credit cards and both balance transfers and debt-consolidation loans are out, then there are two popular methods to pay off that debt: the avalanche and the snowball methods.
With each method, you focus all your spare funds on one credit card's balance while making minimum payments on the rest of your cards. After you pay off that one card, you focus on another card, pay it off, and continue with this process until your credit card debt is gone.
Here's the difference:
The avalanche method saves you the most money, but consumers tend to succeed more with the snowball method because of the motivation they get from paying off credit cards faster.
Both methods can work, so it depends on which option you think fits you best.
If there's one thing to take away from all this, it's that you're playing with fire when you make minimum payments on your credit cards. You may need to work more or make some lifestyle changes to increase your credit card payments, but it's well worth it to make progress on your debt.
If you have credit card debt, transferring it to this top balance transfer card can allow you to pay 0% interest for a whopping 18 months! That’s one reason our experts rate this card as a top pick to help get control of your debt. It’ll allow you to pay 0% interest on both balance transfers and new purchases until 2022, and you’ll pay no annual fee. Read our full review for free and apply in just 2 minutes.
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