Info about Debt Collection
Don’t Fall into the Minimum Payment Trap
Paying only the required minimum amount will often keep you in card debt for decades. These minimums typically range from 2% to 3%, and the lower the percent, the less you’re required to send in every month. The less you send in, the more you’ll pay over the years. For example, consider a $5,000 credit card debt at 17% with differing minimums.
For the total cost, add $5,000 to the interest cost. Paying only the minimum on Card A, for example, would result in a total cost of $30,354 ($5,000 + $25,354).
Look at the numbers in bold. If you send in only the minimum, you could spend anywhere from $25,354 down to $4,296 to pay off the exact same amount, at the same interest rate. Isn’t that amazing?
There’s just a $50 difference between Card B’s and Card D’s first month’s required payment, but Card B ends up costing an additional $7,000 over the years. Wouldn’t you rather have that money than send it to a bank?
Although the 3% minimum would clearly be much better on your wallet, remember that all minimums are set up to make the card issuers money, not you.
Until recently, sometimes companies set the minimums so low that 100% of a cardholder’s monthly payment might be applied to interest and fees, with none of it going toward the original card balance. Then in 2005, in response to growing criticism, the Office of the Comptroller of the Currency (OCC), which regulates national banks, issued new guidelines regarding minimum payment policies.
Now the minimum monthly payments must be high enough to cover all fees and interest—and pay down at least a small portion of the debt. Some minimum payments have gone up, but there hasn’t been any dramatic change. Most members of the CardRatings.com forum report minimum payments in the range of 2% though minimums do vary. Some issuers, for example, compute minimums as 1% of your balance plus any interest charges and fees.
Even with a higher required minimum payment, you’ll save more money by always paying more than that amount. Even paying a little more than the minimum can result in significant savings.