Skip to main content

Debt Sentence - Never Pay Just The Minimum Payment

Image
By
Blue Master Card on Denim Pocket

I'm a big fan of credit cards, they're my go-to way to pay. When used correctly, you can reap rewards at no cost at all.

Credit card companies are smart though, they're not in the business of free lunches. They know how to make money and lots of it. They make billions every year.

Interest is the big money maker, accounting for 40% of earnings. Interest is applied whenever someone carries a balance.

When your payment comes due, you have two options. You can either pay off your balance in full or pay the minimum.

The minimum payment is enticing because it can be much smaller. It's a trap! Don't fall for it. Smart credit card users never just pay the minimum. They pay the balance in full so interest is never owed.

How the Minimum Payment is Calculated

The minimum payment is typically the greater of:
  • 1% of your balance
  • or a set minimum amount, such as $10 
If your balance is lower than the set minimum, then your minimum payment would simply be the balance itself.

Let's demonstrate how minimum payments work (and its dangers) with an example.

Matt's Minimum Payment Mayhem

It's the holiday season and Matt's been busy swiping all over town. 

At the end of the month, he racks up a credit card bill of $2,000. Based on the terms above, his minimum payment would be:

The greater of:

  • 1% of $2000 = $20
  • $10

So his minimum balance would be $20.

Paying $20 sure seems better than coughing up the full $2,000, but don't fall for it. If you only pay the minimum, it'll end up costing you a lot more in the long run.

Matt's credit card charges 19.8% interest, really high but pretty standard for credit cards.

If Matt only paid the minimum 1% a month, it would take 601 payments for him to pay off his bill. That's over 50 years! 

The total interest paid over that time would add up to a whopping $244,199.90! Keep in mind, that's just interest. It doesn't even include the initial bill of $2,000, which now seems trivial.

Yup....for a $2000 bill, Matt could end up paying a quarter of a million dollars over 50 years. Even more if he gets hit with fees along the way. This is a scary example of how compound interest can work against you. Letting interest snowball is how people get into debilitating debt.

Check out the math yourself with this calculator.

Conclusion

Don't fall for the temptation of paying only the minimum, it can spiral out of control quickly. Having the option for low monthly payments is not permission to overspend. Spend with the intention of paying off your balance in full. If you can't afford the balance, you're spending too much. Swipe responsibly.

Labels:

Comments

Post a Comment

Popular posts from this blog

Today's Special: Humble Pie

By
You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark.  Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...
Post a Comment
Read more

Starting Really Really Small

By
On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread.  The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can.  To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do.  Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.  
Post a Comment
Read more

Why We Shouldn't Be Afraid of Ambiguity

By
Ambiguity. That fuzzy monster that chases us down darkened hallways, whispering doubts about our roadmap and feature sets. You know the feeling. You constantly wrestle with unknowns: Will users like this? Is this the right direction? Frankly, if you had a nickel for every time the answer wasn't crystal clear, well, you might actually want to chase that ambiguity down the hall. But here's the thing: ambiguity isn't your enemy. It's your dance partner. Innovation rarely happens in a land of perfect clarity. Sure, there's a time for well-defined processes. But when you're creating something new, there are bound to be more questions than answers. The key is to learn to waltz with the unknown .  Embrace the experiment. Don't be afraid to throw some spaghetti at the wall and see what sticks.  Focus on outcomes, not outputs. Don't get hung up on features. What problem are you trying to solve? How will you measure success? Get comfortable with "go...
Post a Comment
Read more