Way back when, I thought we were doing well financially. We were making money and we were able to pay all of our bills. Every few weeks I would sit down and cut some checks for the amount showing as due.
I didn’t think much of it at the time, but I always paid the minimum amount due showing on my credit card bill. Why do I need to send more? Just cut a check for the amount that they want and it’s all good.
I was wrong… very wrong.
Now that I’ve learned a few things about our finances, I see the error of my ways and I am going to show you what I learned (thanks to a handy calculator at Bankrate.com). Take for example the graph below:
Let’s say you have $5,000 balance on your credit card and you do not use it anymore. You decide to only pay the minimum amount due on your bill in order to pay it off. In this example, the minimum payment is 2.5% of the amount owed. Each time you pay the minimum payment, your balance would go down a little bit and so would your next minimum payment. It would take you over 20 years to pay off your card using this method.
On the other hand, let’s say that you decide to take that first minimum payment (which is $125 in this example) and set that as the amount you are going to pay to your credit card every month. You are used to the payment, so why not just keep paying that amount?
It’s a pretty good idea because your debt will be paid off in less than 5 years by doing it this way.
Pretty amazing, isn’t it? It makes me feel a little silly to admit that I used to only pay the minimum payment all the time (and we were also still charging on our cards, but that’s a different story!).
That’s not all, though. Just look at the money you can save by paying more than the minimum:
You can save over $2,700 in finance charges by paying $125 a month versus just the minimum payment! I can think of a gazillion better uses for $2,700 than giving it away to my credit card company. What about you?
It’s easy to get in the minimum payment trap. I was there and back then I didn’t think twice about only paying what our credit cards said we had to pay. But when you run the numbers, paying a fixed amount a month can make a huge difference.
Tricia is the blogger behind Blogging Away Debt. In her blog, she documents her family’s journey to pay off over $37,000 in credit card debt. Part of her debt reduction plan included a loan from Prosper.com. It originated in June of 2006 and was paid in full in October of 2007.