Minimum monthly payments…a vicious cycle. A cycle that those of us who have been stuck in a debt trap know all too well. We’ve been stuck for quite some time and have only been able to merely get by.
So you scrape together the money by not eating out this week. Or perhaps you make the minimum payment, then go out to eat anyway and USE the card you just made the payment on. You know you’ve done it! ; )
But are you really getting anywhere? Are you making any headway? What’s the big deal with only making the minimum payment for credit cards, lines of credit, etc.? It’s the “buy now, pay later” way of life, right?
Unfortunately, we develop bad habits along the way when we start adopting this mentality with credit cards. We rationalize that we can buy this $1,000 new and improved gadget and only have to pay $35 a month for it.
“Well… I don’t have the $1000 now but I can CERTAINLY afford $35 a month.”
Even if money is tight you start to justify it and say things like “I’ll just work some overtime this month and get it paid off when the bill comes in.” Although the number of people who carry a balance from month to month is slowly starting to decline it’s still far from the norm.
Does any of this sound familiar? So what is the big deal about only making minimum payments?
It takes a lot longer to pay them off.
This is a big part of where the “trap” comes into play. When you only make the minimum payments, you end up paying on the credit card what seems like forever. The reason for this is because not only does the creditor continue to accrue interest at your expense, but you will most likely continue to spend on the credit card until it’s maxed out and finally declines. That is until you develop some better money management habits and learn to control your spending,
When my wife and I were in the deepest pit of our debt trap, we were constantly adding more money to our credit cards. Every time we got a little bit paid off on the card, we would put it right back on, just to make ends meet.
When Christmas time came around, we “needed” to buy gifts. The problem was our credit cards were maxed out and we had no money. So, I would go online or call the credit card company and see if they would increase our limit. Many times, they said, “YES!”
They say yes for 2 reasons:
- If you are consistent at keeping up with the minimum payments they see you as a lower risk.
- They know if they increase your limit, it increases your monthly payment, and it also keeps you paying longer…not to mention all of the added interest!
Increased limit = More accrued interest (revenue for them) = Increased monthly payment = Increased time to pay it off
If you look closely at your statement, tucked away close to the last page most of the time, you will find the information or “warning” about how long it will approx. take you to pay off your account by only making the minimum payment. Keep in mind, that’s assuming you don’t spend any more on the card until you get it paid off.
Here’s the time frame my wife and I personally faced with our credit cards and line of credit. Keep in mind, our credit scores were “average” so our interest rates were rather high on most of our accounts which I will share in the next section.
- On balances of $500-$800, it was approx. 2-3 years
- One of our accounts had a balance of around $1700, it was approx. 10 1/2 years.
- One of our accounts had an original balance of $18,000, it took us over 13 years to pay it off!
You pay a lot more in interest.
Let’s talk about interest. This is how the lender makes a profit. They are selling you a product (credit). If you pay it off at the end of the month they don’t make a profit. Even though they usually incorporate that idea within the sales pitch to get you to sign up for their card (especially store cards), they don’t like it when you do that and they know most people don’t pay it off each month.
That’s one of the reasons the monthly payment is so low when you start out. It’s far more appealing to pay $25/month vs. $100/month or so. So they keep the minimum payment as low as possible in hopes that that’s all you pay. Generally, they keep the minimum payment around a few percent of the total amount due or a baseline of $25 – $30. Whichever is greater.
Let’s get real for a second. Do you know the interest rates on your credit cards?
If you went through the Pre-Budget Reality Check and determined your best method of attack to pay off your credit cards you should have a pretty good idea.
Currently, the national average is 15.50% APR on credit cards. That’s for people with GOOD credit. Depending on your credit history and FICO score you will most likely be paying a lot more interest than that. When my wife and I did our homework and started looking at the interest we were paying we were shocked.
- Visa Platinum account was at 9.9%
- The Line of Credit account was at 14.9%
- The other 5 credit cards had a range between 24 and 28 percent!
And of course…they were all maxed out! We were our creditors’ dream!
Getting these cards paid off as soon as possible will save you a LOT of money on interest.
It causes you lose your momentum and become complacent.
Breaking free from the debt trap is all about building and maintaining momentum. When you’ve been stuck making only the minimum payment on your credit cards for years it’s easy to become complacent and accept credit card payments as the norm. Eventually, you lie to yourself and accept it as your way of life!
You want to break free, but when you have 7 or 8 credit card payments that you have to make each month to keep them from going into collections, it adds up in a hurry.
“But my minimum payment is only $30, $60, $100, etc.”
That may be true. But add up the total amount that you are paying each month in debt payments alone.
THAT’S where all of your HARD EARNED money is going!
THAT’S where your financial freedom is!
Wouldn’t it be nice to be able to open the mailbox (or email) and NOT find the monthly credit card bill each month? Of course, it would! If you stick with me you’ll get there!
But you have to stop being complacent and accepting the lie that credit cards are a way of life!
Complacency = trap!
So how do we break the cycle?
I frequently talk about building your financial attack power. Your financial attack power is all of the added money you create each month by trimming back expenses, maximizing your income, and refusing to pay full price for anything. With that extra money you have 2 options (in terms of debt payoff):
- You could pay a little extra on each one each month. Some people will tell you to divide that money by your number of accounts and add a little to each one.
- You could pick one and throw everything you have at it. With this method, you focus on one debt at a time, (keep making minimum payments on the other ones) get it knocked out as fast as possible and move on to the next one.
I choose number 2! Why? Because if you are always looking for ways to boost your financial attack power, the more extra money you will generate each and every month. The more you can generate the faster you can get one debt knocked out and move on to the next one.
Because of how interest works I usually advise the Avalanche method (highest interest first), but that’s my preferred method. It just makes the most mathematical sense.
However, the snowball method (lowest balance first) works just fine as well.
You can do this. It’s all about focus and momentum. The most important thing is action! Just pick a debt and attack it with every extra dollar you have then move on to the next one when it’s paid off.
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What struggles have you found when only making the minimum monthly payments? Share your story in the comments below.