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Credit card basics: Pay over the monthly minimum payment

Minimum payment

Americans are drowning in credit card debt. The average U.S. household owes more than $15,000 on their cards, according to Debt.org. Because of this large amount of debt, millions of credit card borrowers barely scrape up enough cash each month to make the monthly minimum payment.

But simply making the minimum payment — and not paying a dime more — makes your debt situation much worse, says Beverly Harzog, a credit expert and author of “The Debt Escape Plan.”

Here’s the case for paying over the monthly minimum payment:

“You end up paying a lot more for your purchases than you ever intended,” Harzog says.

For example, say your computer suddenly dies. You rush out and use a credit card to purchase a $700 replacement.

The interest rate on the card is 23%, and the monthly minimum required payment is $25 a month. If you pay the minimum each month, it will take you 41 months to pay off the purchase.

At your current interest rate, you will rack up $313.09 in interest costs. Suddenly, the $700 computer costs you more than $1,000.

A large percentage of borrowers find themselves in this spot. In fact, 39% of Americans carry over credit card debt from month to month, according to the 2017 Consumer Financial Literacy Survey from the National Foundation for Credit Counseling.

Many consumers get so comfortable paying the minimum that they rarely deviate from the practice, even when they have the money to pay down more, Harzog says.

“It’s becomes like a habit,” she says. “So even if you can pay more, you don’t.”

Moving beyond the minimum payment

Perhaps years of making the minimum monthly payment have left you with a mountain of credit card debt. If your spending is out of control and you can’t rein it back in, Harzog has a sobering message.

“You need to stop using your credit card,” she says.

Stopping cold turkey is the most important step to getting credit card debt under control. Once you stop the bleeding, create a plan to go beyond making the minimum monthly payment.

The National Foundation for Credit Counseling recommends the following steps for paying down credit card debt:

  • Create a budget. This can help you find areas to trim back spending. Use any funds saved in this process to pay down credit card debt. Unfortunately, just 40% of Americans have a budget, according to the NFCC.
  • Pay down higher-interest credit cards first. Paying down debts with higher interest costs eventually frees up more money to apply to your other debts.
  • Apply any extra funds to your debt. If you get extra money for any reason — a bonus at work, a birthday gift, a tax refund — use it to pay down credit card debt.

Harzog also suggests a few tips. For example, if your monthly payment due date tends to fall at a time when funds usually are scarce — such as the end of the month — call your credit card lender.

“If you are having trouble making your payments, you can change your due date to any time during the month that works for your cash flow,” Harzog says. Credit card companies have shown a growing willingness to make such adjustments in recent years, she notes.

If your debt is a bit larger, consider a balance-transfer to a card with a low interest rate. This can buy you time to adjust spending and save money to pay down the debt.

A debt consolidation loan also might help you get your obligations under control.

“See what is available,” Harzog says. “You might be able to get an interest rate that’s better than what you are paying now.”

Getting help for more severe debt issues

If your debt problem is especially severe, seek outside help. Talking to a debt counselor can give you ideas and tools that will get you back to using credit cards responsibly.

“There’s no shame in this,” Harzog says. “They can counsel you and point you in the right direction. You can’t know what your options are until you talk to somebody.”

Others with large amounts of credit card debt might be shopaholics, or might spend due to self-esteem issues. In such cases, therapy can get at the root of underlying emotional and psychological issues tied to spending problems.

Harzog is empathetic toward those who have a mountain of debt and feel hopeless about whittling it down.

“That’s an awful feeling,” she says. “I know it from firsthand experience.

However, she says most people who successfully tackle their debt and start paying more than the minimum amount each month find the change satisfying. Those good feelings typically keep them on track for the long haul.

“Most stick with it, because they can feel the stress melting away,” she says.

Chris Kissell

Chris Kissell has been a writer and editor for more than two decades. His work has appeared in numerous newspapers and magazines, and on many news and financial websites. He lives in Denver, Colorado.