Personal finance

Credit card minimum-payment trap

The minimum payment is designed to keep you paying. See how many years it really takes. And what a fixed payment saves instead.

A credit card's minimum payment is a small percent of the balance, so it shrinks every month as the balance falls. That is the trap: the payoff stretches over years and interest piles up. A fixed payment, the same dollar amount every month, clears the balance far faster and cheaper.

Cards usually set 1 to 3%, floored at ~$25.

What paying a steady amount would do.

Enter your balance and APR.

Worked example

A $6,000 balance at 22% APR: a 2%-of-balance minimum versus a fixed $250/month:

ApproachTime to clearInterest paid
Minimum payment (2%)11 years 5 months$10,440
Fixed $250/month2 years 8 months$2,000

Paying the minimum drags the $6,000 balance out to 11 years 5 months. A fixed $250/month clears it in 2 years 8 months and saves about $8,440 in interest, same card, one changed habit.

Questions

Why does the minimum take so long?

Because it is a percent of the balance, it falls as the balance falls, so each payment covers less principal. Near the end you are barely beating the interest, which is why a percent-based minimum can stretch a payoff across many years.

What's the fastest way out of card debt?

Pay a fixed amount well above the minimum, and target the highest-APR card first (the avalanche method) to minimize total interest. A 0% balance-transfer offer can help if you clear the balance before it expires.

Is the interest figure exact?

It is a close approximation. A real card recomputes the minimum every month as the balance changes; this models the starting minimum as a level payment, which slightly understates the true interest. So the real trap is a little worse, not better.

Related tools

Minimum-payment interest is a close approximation; a real card recalculates monthly. Not financial advice.