Paying the Minimum on Your Credit Card Will Cost You a Boatload

We've all seen the examples of how long it takes to pay off a credit card loan and how much it costs to do so if you only make the minimum payment. But I've never posted an example here at Free Money Finance (I know -- that's hard to believe). So I thought I'd run you through a few scenarios on how much a $5,000 loan would cost in interest and how long it would take you to pay off assuming various interest rate assumptions. Here are some of the results using Bankrate's credit card calculator and a minimum monthly payment of $200:

• 6% interest -- 111 months and $696.31 in interest.
• 12% interest -- 128 months and $1,622.42 in interest.
• 18% interest -- 150 months and $2,915.66 in interest.

Yikes! See, I told you it was a boatload!

Even at an unbelievable 6% interest, it still hangs over your head for almost 10 years -- and that assumes you don't charge any more (which most people will). At 18%, it's with you for twelve and a half years and costs you almost 60% of your original amount in interest.

Kiplinger's gives some advice on how to pay off your credit cards to minimize these expenses:

The best advice is to ignore the card's minimum payment and pay as much as you can every month. Paying down a credit card with an 18% interest rate should be one of your very first financial priorities -- the rate is probably a lot higher than any other loans you have and you're unlikely to find other investments to beat that rate (other than your employer's 401(k) match). Switching to a lower-rate card can make a big difference, too.

I'm with them 100% on this.

If you're having problems with credit card debt and need some more resources and information, check out Best of Free Money Finance: Credit Card Posts. For thoughts on other kinds of debt, see Best of Free Money Finance: Debt Posts.

Comments

[Kim L.]

Why is 6% so unbelievable? I have a card with 4.9% and it's been that way for a very long time. My other one is not much higher at 7.9%. They are still out there and I bet there are a decent amount of people that have them. So many posts I see that just presume someone's interest rate is really high. Why is that?