The minimum payment trap: how $3,000 can take 15 years

A credit card statement shows a “minimum payment due” in large friendly type. It is designed to feel small and safe. It is neither.

The example

Take a $3,000 balance on a card charging 22% a year, with a common minimum rule: 1% of the balance plus that month’s interest, and never less than $25. You stop spending on the card and pay only the minimum.

• Time to clear it: about 15 years
• Interest paid: about $4,400, more than the original balance

Now make one change. Pay a fixed $150 a month, ignoring the shrinking minimum.

• Time to clear it: about 2 years and 2 months
• Interest paid: about $770

Same card, same rate, same $3,000. The difference is only what you decide to pay each month.

Why the minimum is so slow

Most of an early minimum payment is simply the interest. Only a sliver reduces the balance, so next month’s interest is almost as large as this month’s. The minimum then shrinks as the balance shrinks, which stretches the repayment further. The card issuer earns interest for as long as the balance lives. That is the incentive behind the design.

What to do

1. Pick a fixed amount you can sustain and pay it every month, even when the minimum falls.
2. Check the rate on each card, and pay the most expensive one first.
3. Stop adding to the balance while you clear it.

The card minimum-payment tool lets you enter your own balance, rate and payment and see both timelines side by side. Chapter 12 of the book explains how revolving credit is priced and what to ask before you rely on it.

Illustrative figures using the assumptions above. Your card’s minimum rule and rate will differ; this is general education, not personal advice.