With 3,000 at 20%, paying 50 a month never reduces the debt. How much a little more changes.
Key findings
- With 3,000 at 20%, the first month's interest is 50: a payment of 50 never reduces the debt.
- Paying 80 a month takes 5 years and costs 1,747 in interest.
- At 120 a month, 2 years and 9 months and 913: you save 834.
Why the minimum payment costs so much
Credit cards and revolving credit charge high interest on what you owe and let you pay little each month. That small payment goes mostly on interest, the debt falls very slowly and interest keeps running on almost the whole balance.
An example: 3,000 at 20%
Imagine a hypothetical debt of 3,000 at 20% a year. The first month adds 50 of interest (3,000 × 20% ÷ 12). Only what you pay above that 50 reduces the debt:
| Monthly payment | Time to clear it | Interest paid |
|---|---|---|
| 50 | Never: it only covers interest | — |
| 80 | 5 years | 1,747 |
| 120 | 2 years and 9 months | 913 |
| 200 | 1 year and 6 months | 481 |
At 80 a month, the first payment only cuts the debt by 30. Going up to 120 does not sound like much, but it clears the debt more than two years sooner and saves you 834 in interest.
If the minimum is a percentage
Many cards set the minimum payment as a percentage of what you owe. As the debt falls, so does the payment, so it takes even longer to finish than with a fixed payment. The best defence is to choose a fixed amount yourself and not lower it even if the lender allows it.
How to get out sooner
- Pay a fixed, sufficient amount, not the minimum. The table shows how much a little more each month changes.
- Stop using the card while you pay it off: every new purchase stretches the debt.
- If you have several debts, put the extra towards the highest rate (avalanche) or the smallest balance (snowball), paying the minimum on the rest.
- Ask about moving the debt to a loan at a lower rate, comparing the APR and all costs.
Work out your case with the debt payoff calculator and, if you have several debts, with the snowball vs avalanche calculator.