The Lure of Credit Cards – The Minimum Payment Trap

One primary factor contributing to the savings problem in America is the continued reliance on credit cards to purchase things one wants but does not necessarily need. The mounting debt Americans pile on is alarming:

  • 13% of Americans expect to be in debt the rest of their lives1
  • The average credit card debt is $5,4001
  • Of this debt, 52% go towards paying for basic necessities
  • The average student debt held is $24,1551
  • Of these, 66% said they would have changed their decision taking student loans1

Some individuals may be easily lured into paying only the minimum balance due on their monthly credit card bill. Perhaps they feel it gives them more spending power. However, this merely creates short-term relief, often creating even more debt. The following chart shows the effects of making a $20 minimum monthly payment on a credit card debt of $1,000 with a 17.9% annual finance charge over the course of one year.

Month                   Payment                    Balance

January                        $20                            $994.92

February                      $20                            $989.76

March                           $20                            $984.52

April                              $20                            $979.21

May                               $20                            $973.81

June                              $20                            $968.34

July                               $20                            $962.78

August                          $20                            $957.15

September                   $20                            $951.42

October                        $20                            $945.62

November                    $20                            $939.72

December                    $20                            $933.74

              Total  Payments   vs.   Reduction in Debt

                          $240                           $66.26

As you can see, by making the minimum payment each month, you are barely making a dent in the overall principal because of the accumulating interest going against your outstanding debt. Through this example, it would take Jake 93 months (or nearly 8 years) to pay off his $1,000 credit card bill. In doing so, he would pay $850 just in interest, 85% more than his original debt.

What can this teach students and young adults?  To look at debt not in terms of what it enables you to buy, but instead what it will cost you over time, both in principal and interest.

88WP – 2023.08