Minimum Payments are the Devil’s Only Friend

For most people, minimum payments on credit cards debt might mean  7-12 years of payments.  You read that correctly!  SEVEN to TWELVE YEARS.

I’ve learned from my clients that the average consumer doesn’t understand how credit card payments really work or why their balance never seems to decrease.  So here’s answers to a few frequently asked questions about credit card debt.

How Is My Minimum Payment Determined?

Credit card companies determine your minimum payment to maximize their profits, and not to help you pay down debt.  Every month (or year) that goes by while you make minimum payments, you’re making the credit card company richer, and not doing yourself any good.  The minimum payment is often only 2% of your balance.  Assuming you have a $3,000 balance, your minimum payment would be $60.  However, if your APR is 22% then you’ve added $55 in interest, which means your minimum payment only reduces your balance by $5!  If you want to pay down your balance, you have to calculate a payment that will cover more than just interest.

How Long Will It Take Me to Pay Off My Credit Cards?

This all depends on your balance(s) and the amount you can reasonably afford to pay each month.  Using “average” statistics from across the country, most households carry about $15,000 in credit card debt and have an average APR of 16%.  If you make minimum payments totaling $300 per month, it will take you 83 months (7 years) to pay off your balance, adding an additional $9,883.31 in interest.  This calculation also assumes that during those 7 years, you do not add any new charges and you consistently make a payment every single month, on time.  Again, if you want to payoff debt faster, you have to pay well more than the minimum payment.

If you’d like to see how long you’ll be paying, try a few of these helpful calculators: or

If I Have Multiple Credit Cards, How Do I Divide My Payments to Reduce Payoff Time?

There’s no single answer to this question.  The answer depends on a variety of factors and therefore this is something that you have to examine on a case-by-case basis.  Generally speaking, however, you should try to pay down the card with the highest interest rate first.

How Do I Decide If I Should Payoff My Credit Cards (or File Bankruptcy)?

Here again, the answer depends.  However, the most straight-forward approach is to calculate your debt-to-income ratio (DTI).  If your DTI ratio is above 40% that means nearly half (or more) of your income is going toward debt payments.  This also means you probably don’t have much money left to save, spend, or handle unforeseen expenses leaving you vulnerable to more debt in the future.

Also, with such a high DTI ratio, lenders may severely limit your borrowing options.  This is especially important if you are hoping to make a large purchase in the near future, such as a new car or home, and you expect to borrow the money for this purchase.

If you are planning such a purchase, you can’t afford to stick your head in the sand any longer.  You need to tackle your debt so that when the time comes to apply for a mortgage, you’re not surprised by the results.

Alternatively, you can use one of the payoff calculators to plan your way to debt-freedom, but remember to be realistic about your payment plan.  Unreasonably high or long plans tend not to work because they look good on paper, but they’re difficult to stick to in reality.

Bankruptcy Provides a Quick and Efficient Solution: a Fresh Start

Like most financial advice, there’s not a one-size-fits-all approach.  Everyone has a unique set of circumstances that will dictate whether they should attempt to pay-off their debt, or file bankruptcy.

Bankruptcy can eliminate credit card debt entirely in as little as 4 months. So if you’re considering a home purchase in the next 3-5 years, but your pay-off plan is 7-12 years, bankruptcy can speed up your recovery and free up cash each month so you can save for a down payment.

And while bankruptcy does “hurt” your credit (at least initially), most lenders will offer you a home mortgage loan after 24 months and a few will even offer you a loan in as few as 12 months.  Either way, after bankruptcy you can start rebuilding credit immediately if you rely on the right advice.



Call: (908) 353-6700    Text: (908) 266-4843    E-Mail

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