Tenet 6: Learn the Cost of Making Minimum Payments on Credit Cards

Once we’ve set up a budget, minimized our fixed expenses and variable costs, and have learned to track within our budget, we can begin to get into more “advanced” techniques of saving money. Learning the cost of making minimum payments on credit cards can save us thousands of dollars if we “see” the dollar amount and take action to reduce it.

When we are offered credit cards, the first thing that we should scrutinize is the rate of interest that we are charged. Depending on the balance that we carry, a high interest rate may have us longer in debt than we originally anticipate. We should always know and understand the implications of the interest that we are charged.

Most of us find it hard to get out of credit card debt because it is directly related to paying only minimum payments on our credit cards. This is why we should minimize our fixed monthly expenses at all cost. The more money that we save by minimizing our expenses, the more money we’ll have available so that we can pay more than our credit card’s required (and desired) minimum payments.

Again, the interest rate on our credit cards directly relates to how long it takes to pay them off, especially if we only pay the minimums. I addressed three examples in my book, How We Prevent Wealth: A Personal Finance Reflection. I used the “true cost of paying the minimum calculator” on Bankrate.com to determine the numbers in the following scenario:

(The minimum payments are assumed to be 2% of the balance.)

• Credit Card 1
• Balance – $5,000.00
• Annual Interest – 18%
• Minimum Payment – $100.00
• Credit Card 2
• Balance – $2,500
• Annual Interest – 22%
• Minimum Payment – $50.00
• Credit Card 3
• Balance – $1,000
• Annual Interest – 12%
• Minimum Payment – $20.00

If we were to try to pay down these debts, assuming that we no longer charge a single penny to these cards, it will take years to be rid of these credit card balances. According to the credit card calculator, we would be stuck with the following if we made only the minimum payments:

Credit Card 1: It will take us 472 months to be rid of our debt, and in this time we would pay $13,396.73 in interest.

Credit Card 2: It will take us 859 months to be rid of our debt, and in this time we would pay $20,551.93 in interest.

Credit Card 3: It will take us 99 months to be rid of our debt, and in that time we would pay $544.95 in interest.

So yes, it would take us almost 72 years to be rid of all of our debt with over $34,000 in interest payments made!

Visit the “true cost of payment the minimum” calculator yourself.

Hopefully, the numbers above will help you understand why credit cards are considered horrible financial tools; it’s because we don’t understand the true cost of our credit, which means that we may never end up paying off our balances. This is also why Department Store credit cards are arguably the worst type of cards–their interest rates are usually always over 19.99%.

Use the calculator above and feel free to share in the comment section below if you had no idea the true cost of your credit cards, if you were only paying your minimum balances.

This post is part of a “mini-series” that will attempt to educate and help readers deal with practical money management skills. This post is a tenet that was covered briefly as an underlying principle in my book, How We Prevent Wealth: A Personal Finance Reflection.