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How debt works · Lesson 3 of 10

The Minimum Payment Trap and How to Escape It

See why paying only the card minimum can keep you in debt for years, and how a fixed payment above the minimum gets you out sooner.

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THE WRITTEN LESSONFollow along at your pace

Every card statement shows a minimum payment. It looks like a helpful number, but paying only that amount can keep you in debt for years. In this lesson you will see why, and how a fixed, higher payment changes the picture.

Set low on purpose

The minimum is usually a small slice of the balance, often a few percent. As the balance falls, the minimum falls too. That feels easy, but it means you pay off less and less each month, while interest keeps running.

A statement showing a balance of 2,000 dollars, interest this month of 30 dollars and a circled minimum payment of about 3 percent. Six bars on the right show the minimum falling from 60 dollars in month 1 to 30 dollars in month 6, with a red coin under each month for interest.(opens the full-size picture)
The minimum gets smaller each month, but the interest keeps coming.

Thirteen years

Take the same $2,000 at 18%. Pay only the shrinking minimum, and it can take about 13 years to clear, with nearly as much paid in interest as you borrowed: about $1,750. A fixed payment of $160 a month clears it in about 14 months.

The minimum is not a plan. It is the smallest amount your card issuer will accept without treating you as late. Because it falls as your balance falls, it never gives interest less time to work. A fixed payment stays the same, so the balance drops faster and faster as less of each payment is needed for interest.

Two bars for 2,000 dollars at 18 percent: borrowed 2,000 dollars in blue and interest 1,750 dollars in red. Beside them, a strip of 13 red year boxes labeled Minimum only: about 13 years, and one green box with a check labeled Fixed 160 dollars: about 14 months.(opens the full-size picture)
Same debt, same rate: about 13 years at the minimum, about 14 months at $160.

Many people get stuck here

This is not rare. In one large study of card accounts, about 3 in 10 were regularly paid at or near the minimum. And paying the minimum on time does not stop interest. It only stops late fees. If you can only manage the minimum for now, do that on time, and then use the rest of this course to find more room.

A row of ten credit cards with three tagged Minimum, and large text reading 3 in 10 card accounts are paid at or near the minimum. A red-crossed myth box says Paying the minimum on time means no interest, with notes Interest keeps running and It only stops late fees.(opens the full-size picture)
Paying the minimum on time is not the same as paying no interest.

Pay in full where you can

On most credit cards, if you pay the full statement balance by the due date, new purchases cost no interest. Pay less than that, and interest falls on what is left, and new purchases may start costing interest straight away.

Rules differ by country

Some card issuers do not offer an interest-free period at all. Check your own statement and your card terms to see how yours works.

Two cards side by side. The green one, Paid in full by the due date, shows a card, a calendar, a full balance paid bar and No interest on purchases. The red one, Paid part, shows a card with an 18 percent tag, a warning sign, a paid and left bar, and the lines Interest on the rest and New purchases may cost interest too.(opens the full-size picture)
Full payment by the due date keeps purchases interest-free on most cards.

Fix a payment above the minimum

So pick a fixed amount above the minimum, one you can keep up every month, and set it as an automatic payment. As the minimum falls, keep paying the same amount. Every extra dollar goes straight to the balance.

Three numbered steps. One, a statement with a 60 dollar minimum and a pen: Pick a fixed amount, 160 dollars a month. Two, a calendar labeled Every month: Set it to pay automatically. Three, a falling green balance line from Now to Later: Keep paying the same.(opens the full-size picture)
Pick it, automate it, keep it the same as the minimum falls.

YOUR TURN

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Read the full lesson script

Welcome back. Every card statement shows a minimum payment. In this lesson, you'll see why paying only that amount can keep you in debt for years, and how a fixed, higher payment gets you out.

The minimum is usually a small slice of the balance, often a few percent. As the balance falls, the minimum falls too. That feels easy, but it means you pay off less and less each month, while interest keeps running.

Take that same two thousand dollars at eighteen percent. Pay only the shrinking minimum, and it can take about thirteen years to clear, with nearly as much paid in interest as you borrowed. A fixed payment of a hundred and sixty dollars clears it in about fourteen months.

This isn't rare. In one large study of card accounts, about three in ten were regularly paid at or near the minimum. And paying the minimum on time does not stop interest. It only stops the late fees.

On most credit cards, if you pay the full statement balance by the due date, new purchases cost no interest. Pay less than that, and interest falls on what's left, and new purchases may start costing interest straight away. Rules differ by country, so check your statement.

So pick a fixed amount above the minimum, one you can keep up every month, and set it as an automatic payment. As the minimum falls, keep paying the same amount. Every extra dollar goes straight to the balance.

So remember: the minimum shrinks as you pay, so it keeps you in debt for years. Paying the minimum on time doesn't stop interest. And a fixed payment above the minimum is the way out. Before the next lesson, find the minimum and the full balance on your next statement, and choose a fixed amount above the minimum. Next, you'll list every debt you have.