How Much Does Your Credit Card Debt Cost You?

By Debbie Dragon. Last updated 4 January 2012. 11 comments
Photo: meddygarnet


Credit cards sometimes make a purchase hard to pass up. For example, they make it possible to buy something for $3,000 and pay just $60 per month until it's paid off. Most people can afford a $60 monthly payment, but what is often overlooked is how much you end up paying in interest. A common mistake people who are new to credit cards often make is paying just the minimum payment on their credit card bills. The small monthly minimum payments seem insignificant and comfortable in most budgets until you look closer at what your credit card debt is really costing you over time. (See also: 6 Steps to Eliminating Debt)

How to Calculate True Credit Card Debt Costs

If you carry an average daily balance of $3,000 in credit card debt, your minimum payment will be around $60 a month (assuming a 2% minimum payment requirement — but some cards may have a different minimum percentage). If the credit card charges a 15% APR, interest could cost you between $400 and $450 per year.

Here's how to figure it out:

  1. Divide your APR by 365 days per year. 15% / 365 = (about) .04%
  2. Multiply .04% by 30 days per month. .04% x 30 = 1.2, or .012%
  3. Multiply .012% by the $3,000 original balance = $36.00 a month in interest 

With a $60 minimum payment, $36 goes toward interest each month and $24 goes toward your $3,000 credit card balance. So after you send your first $60 payment to your $3,000 credit card bill, you will still owe $2,976.

If you only pay your minimum balance due each month (2% or $25 minimum), it will take approximately 16 years to pay off your $3,000 debt. During those 16 years of making the minimum payments, you will have paid $3,641 in interest, turning your $3,000 purchase into a $6,641 one, according to results from a minimum payment calculator on Whatever you purchased for $3,000 will likely be broken and forgotten long before you've paid for it in full!

Avoid Becoming a Credit Card Victim

Credit cards are important in our lives now — you need one to reserve a hotel room, rent a car, or book tickets for travel. They can provide a source of emergency funds if you've been injured or have another emergency that must be paid for right away. But you want to get into the habit of paying for your credit card debt in full each month as often as possible to avoid paying interest — or at least pay as much as you can toward any credit card debt to reduce the amount of interest you pay rather than making just the minimum payment.

How to Reduce Your Current Credit Card Debt

If you've already racked up debt on a credit card or two and want to avoid paying the credit card company high interest amounts, you'll want to become proactive in paying off your credit card balances.

Start by creating a budget that allows you to allocate as much money as possible to credit card debts, rather than sending just a minimum payment to each account every month. Get a debt management plan in place.

You should also take a look at balance transfer credit cards. If you are eligible for a card with a 0% interest promotional offer for balance transfers, you can move your higher-interest credit card balances to the lower-interest card and focus on paying off your debt. Since you won’t be charged interest during the promotional period, all of your monthly payments will be applied toward the principal balance, which will help you pay your debt off faster.

Finally, if you find you are barely able to pay just your minimum credit card payments, you should contact the National Foundation for Credit Counseling for advice.


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Guest's picture

Wow. $3,000 doesn't seem like that much credit card debt, but the interest really adds up. I first realized this when they added the new boxes about minimum payments to my monthly statements. I've been paying more than twice the minimum, but my interest rates are all 18% or higher, so it hasn't made a huge dent. I might look into balance transfers to see if that helps. I can afford the monthly payments, but when I think about how much it costs in year I want to scream.

Guest's picture

I have really gotten in the habit of paying my credit cards off each month. I know allot about credit and have now learned the art of using my credit cards to get cash back by using them for transactions to get points but not to ring up debt. Items I want to buy I have money withheld from my check deposits and automatically saved. When I have the money I buy, if not I wait.

Guest's picture

Hello Debbie. You've made some excellent points.

1) Your example of the mistake of making just minimum payments on credit cards is a good one. It would be interesting to compare that to making a fixed monthly payment. So, using the same numbers, let's say that instead of making the minimum payment each month, you paid $60 each month (which in theory should be affordable because that is your initial minimum payment). You'd pay off the card in 6 1/2 years, and the total interest would end up around $1737, a significant savings.

If you wanted to make occasional extra payments, that would help even more.

Your article inspired me to add an extra payments feature to my credit card payment spreadsheet (which I uploaded just a few minutes ago). The spreadsheet lets you run all these scenarios. You can download it from here:

2) If you have multiple cards to pay off, a very simple debt management plan is to use the Debt Snowball approach. It's not really that complicated, and your recommendation to start by first figuring out from your budget the maximum amount you can allocate towards debt reduction is spot on. Here is another free spreadsheet that can be useful to help a person apply the debt snowball method:

Guest's picture

I know exactly what this article is talking about. I was in that predicament when I tore my achilles tendon in 2006. I had around 4 credit cards with a $4,000 available credit combined and had to use that to support my family until I was unable to get back to work. Not only did it put me in more debt, but it affected my credit too. I was able to get back on track after working overtime for a few months to pay everything off. Chase was the best that gave me huge breaks during my injury. My advice, be careful what you spend on credit cards and don't make minimum payments.


Guest's picture

It's costly! I noticed one small mistake in your calculation...
"Multiply .04% by 30 days per month. .04% x 30 = 1.2, or .012%" should read
.04% x 30 = 1.2% (not 0.12$ which would be about $3 out of those $3000)

A friend of mine shared his interesting experience. He had a substantial credit card debt from Chase. He had several late payments and one or two missed when Chase send him a letter than his interest is increasing to a point where he couldn't afford his monthly payments. So he called them, got a manager on the phone and declared that they are forcing him into bankruptcy and he's not going to pay a single penny on his debt. After some negotiation he got them to remove all his penalties and interest if he repaid his full remaining principal amount. That's the way to do it =D

P.S. He tried the same with the other two banks he owns money but they agreed to nothing. I guess it doesn't work if you've been a good payer before you call them.

Guest's picture

If you like to calculate, try calculating the 8 to 10% sales tax you paid for the items charged, then calculate up to maybe 33% income tax you paid to get the after-tax money to make the payments on the items, and then calculate up to 8% inflation (lost purchasing power) per year on the before-tax amount, and you could also add in a lost-opportunity cost for maybe buying something else that might have inflated in value, etc. Then you can multiply this whole shebang by the number of years it takes you to pay off the debt.
Then reach for the aspirin...

Julie Rains's picture

The credit card calculators rock. Seeing those illustrations either online, doing your own calculations, or getting that info from the credit card company is eye-opening. One of the first personal finance conversations I had with friends when I started working was the high cost of cc debt; once we realized the cost, we curbed spending -- even if we didn't yet have furnishings for our apartments or the right clothing for work.

One thing I'll mention about the "0%" or low-interest teaser offers is that most of them have an upfront fee attached. So, in order to get the 0% rate for a year or 18 months or whatever, you pay 3% or 6% now -- read the fine print to see what your offer says. Looking at the link to the balance transfer site, it looks like this charge is called the "balance transfer fee"; generally it is a % but it may be a flat charge.

Guest's picture
Steve in W MA

There is a simpler preventive measure. Realize that at t 20% annual interest, a $100 purchase with one month's interest costs $101.16.

Given the choice of buying something for cash now for $100 and the same thing for cash in one month for $101.16, why would you take the "pay it one month later, more expensively" option?

it's very basic.

Guest's picture
Common Sense Jones

It's called an EMERGENCY and you NOT having the money and needing the money NOW. Bills and car payments don't wait a month and the gas tank doesn't give you a month to fill it up.

Guest's picture

A really tough scenario was when my son got a Best Buy Credit Card. It took him forever to pay it off as the interest was in the upper 20% range. Finally we helped him with it and finally got it paid. Stay away from Department store credit cards.

Guest's picture

I think credit card interest expenses are likely one of the largest overlooked costs for many families. This is particularly true for those who have multiple credit cards and fail to add up $20 in interest here, $15 there etc.