The Minimum Monthly Payment Trap

by Mark Kennan

    Credit cards have been the financial downfall of many consumers: they let you spend away without having your wallet feel any lighter after each purchase. You can dig yourself an even deeper hole if you choose to make just the minimum payment -- because interest keeps accruing on the large unpaid balance.

    How Minimum Payments Work

    The minimum payment is often a very small percentage of what you owe. Federal law requires that the minimum payments be set up to pay off your credit card debt "over a reasonable period of time." It's a vague guideline, but many credit cards require you to pay at least 1 percent of your balance plus any interest or fees tacked on for the billing period. That way, you're at least guaranteed to lower your balance, but not by much.

    The Trap

    Credit cards are also notorious for charging high interest rates when you don't pay your balance in full. According to, as of May 2013, the average rate was just over 13 percent for all fixed-rate cards and just over 15 percent for all variable rate cards. When you only pay off 1 percent of your original balance each month plus interest and fees, that means you're going to be paying interest on a large portion of your balance for a long time and you won't pay off the last of the initial balance for over eight years.


    Sometimes, there's nothing better than running the numbers to get a feel for how much of a trap the minimum payment can be -- look at what it can cost you over the repayment period. According to DePaul University, if you charged just $500 on your credit card and paid 2.5 percent of the balance -- or $12.50 -- each month, at 18 percent interest, it would take you seven years and $865.40 -- $365.40 of interest -- to pay off the balance.

    Statement Requirements

    Federal laws that went into effect in 2010 require your credit card company to make this clearer on your monthly credit card statements. First, the statement has to tell you how long it would take to pay off your balance just making the minimum payment and how much you would pay overall. Second, it also must include what you would need to pay each month to pay off the balance in three years and how much you would pay.

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