43% of Consumers With Credit Card Debt Are Making This Huge Mistake

This mistake can take your credit card debt from bad to worse.

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.

How many people make minimum credit card payments?

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):

• 35% only made the minimum payment
• 8% made less than the minimum payment
• 58% made more than the minimum payment

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 cost of paying the minimum

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.

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.

How to get out of credit card debt

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.

A balance transfer

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.

A debt-consolidation loan

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.

Paying off multiple credit cards

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:

• Avalanche method -- You focus on the credit card with the highest APR.
• Snowball method -- You focus on the credit card with the lowest balance.

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.

Cutting down credit card debt

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.

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