Credit Cards Now Charge Very Low Minimum Payments: Don't Fall for It!

One of the most insidious things about credit card debt has to do with the way the math works. It isn't designed to get you out of debt. If it was, it would be based on a time frame or a fixed monthly payment, like mortgages and most other loans. Instead, each month's required payment on a credit card bill is a percentage of what you owe.

In "days of yore," minimum payments were pretty straightforward, averaging about 5% of the outstanding balance. But over the last decade or so, that has dropped to around 2%, and most recently, to even less than that on many credit cards. In fact, Consumer Action's recent survey on the credit card industry found quite an assortment of minimum payment calculation methods, with some lenders now only requiring 1% plus fees and interest rate hikes.

And certainly, no one in their right mind would call the current calculations straightforward! Some lenders have amazingly complicated formulas, so next time you're in need of a sleep aide, skip it on the pricey pills and look at this table from Consumer Action's survey, which details how the top ten lenders do the math.

What a Difference a Few Percentage Points Make
No matter how your card issuers calculate the minimum payments, if you only send in that amount, you are going to pay a lot more in interest than you realize. For example, consider two $5,000 credit card bills, both at 15%, both based on the assumption that there won't be any additional charges. The first is typical of what might be in your wallet today, while the second one is based on the rate from those days of yore:

1. With 2% minimum payments, you'll pay $7,789 in interest by the time the bill is paid off – in around 32 years. Your first required payment would be $100, with the required amount going down very slowly, month after month, until it reaches $10 a month … in the middle of year #25. (If you're wondering about that $10, it's because lenders have minimum dollar amounts that eventually kick in.)
2. With the days of yore 5% minimum payments, you'd pay $1,632 in interest by the time the bill is paid off – in around 9 years. Your first required payment would be $250, with the amount going down, month after month, until it reaches $10 a month … at the start of year #7. (Ditto.)

While it's true that there's a big difference in the required payments at the outset, I hope the $6,157 in savings is enough to inspire you to ALWAYS come up with more than the required minimum amount on your cards. You don't have to crunch the numbers and think in terms of percents to save big. Just send in more every month than the amount required.  For example, take a look at what happens to today's 2% minimum card if you …

• Send in $3 more than the required amount every month. You'll save $1,293 in interest and almost 8 years of payments.
• Send in $25 more a month. You'll save $4,533 and 22 years of payments.
• Send in $50 more a month. You'll save $5,652 and 26 years of payments.
• Send in $100 more a month. You'll save $6,506 and over 28 years of payments.

If you're wondering why $100 a month on a 2% minimum card can save you so much … it's because of the way credit card math works, with its minimum percents and dollar amounts. Confusing? Think about it late at night to help you fall asleep, if you must, but please don't be tempted to only pay the minimum amounts. Simply come up with an additional sum you'd never notice, invest, or miss and send that in every month, along with your required payment. While you may not catch up on your sleep, you'll surely save a bundle.