Credit Card Minimum Payment

The "Minimum Payment" Trap

Credit card companies make money when you carry a balance. They want you to stay in debt. To ensure this, they set the "Minimum Monthly Payment" very low—usually just 2% or 3% of your total balance.

Why is this dangerous?

If you owe $5,000 at 20% APR, your monthly interest charge alone is roughly $83. If your minimum payment is only $100, you are essentially paying:

• $83 to the Bank (Profit)
• $17 to your Debt (Principal)

At that rate, it will take you over 25 years to pay off the card, and you will pay more in interest ($8,000+) than the original $5,000 you borrowed.

Understanding APR (Annual Percentage Rate)

APR is the yearly cost of borrowing money. However, credit card interest compounds daily or monthly, making the effective rate even higher.

Most cards today carry an APR between 15% and 29.99%. This is significantly higher than a mortgage (6-7%) or an auto loan (5-9%).

Payoff Strategy: Avalanche vs. Snowball

If you have multiple cards maxed out, use one of these two proven strategies to escape.

1. The Avalanche Method (Mathematically Best)

List your debts by Interest Rate (highest to lowest). Pay the minimums on everything else, but throw every extra dollar at the card with the highest APR (e.g., the 29% card). This saves you the most money in the long run.

2. The Snowball Method (Psychologically Best)

List your debts by Balance Size (smallest to largest). Ignore the interest rates. Aggressively pay off the smallest card first ($500) to get a "Quick Win." Then roll that payment into the next smallest card ($1,200). This builds momentum.

Payment Scenarios

Here is what happens to a $5,000 balance (20% APR) depending on how much you pay per month.