I’m working on a big post on how to really pay down your credit cards fast, but I thought I would share a piece of the puzzle with you: don’t make the minimum monthly payment on your credit cards!

Many people out there pay whatever the minimum monthly payment is on their credit card statements, decreasing their payments as their balance drops. This is a sure way to pay far too much interest to the credit card company and take far too long to repay the debt.

Let’s use the minimum payment calculator at BankRate.com to study this (I’ve added it to a new page for Tools and Calculators):

I’ll assume a credit card with a $5000 balance and an 18% APR. With an industry-standard 2.5% minimum monthly payment it will take 313 months (or roughly 26 years) to pay off the debt, and we’ll incur over $7000 in interest.

If we simply pay the initial monthly minimum of $125 every month instead of the steadily decreasing monthly minimum, we are down to 62 months and roughly $2700 in interest. That is almost 21 YEARS shaved off the repayment time! And if you can afford the initial minimum, you should be able to afford it across the 62 months.

By digging deep and throwing an extra $25 a month at the card for a total of $150 a month, we are paid off in 47 months and end up paying about $2000 in interest.

A final point of interest (no pun intended) involved getting a better interest rate. I have a credit card with an 11.75% APR. The same $5000 balance with a $150 a month payment would be paid off in 41 months and I would only incur roughly $1100 in interest.

According to BreakingNewsBlog, the US federal government will be forcing card companies to raise the minimum monthly payment from at least 2% to at least 4%. This is a good move that should help with debt repayment and keep particularly evil card companies from charging more in interest and fees than the 2% minimum would cover (found through the aggregator).

So to get started on the road to being debt-free, decide today to fix your payments at the current minimum, ignoring future monthly minimums on your credit card statements. If you can, pad the payment, even a little bit. Finally, try to negotiate a lower interest rate with your card company, if necessary move to a different company (but make sure it has a lower permanent APR, not just a lower introductory APR), and don’t be afraid to tell your current company that you will be shopping around and if they want to keep your business they need to lower your rate.

This entry was posted on Wednesday, April 27th, 2005 and is filed under Credit Cards. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.