Avoiding the Minimum Payment Debt Trap

For people who need to make large purchases using a credit card, the minimum payment requirement can seem like a saving grace. On a $2000 credit card balance, a 2% minimum payment means that you only owe $40.00 or less each month. While this may seem like a great deal, a low monthly payment can actually be a major debt trap. You may pay less month to month, but in the long run you could end up paying thousands of dollars in interest, leading to years of unwanted debt.

How It Works

Every credit card has an interest rate that is applied to your balance and carries over from month to month. The longer you keep a balance on your card, the more interest you will accrue over time. If you continue to make only the minimum payment, much of your money will go towards paying off just the interest on your card, not the original amount that you owed.

This means that a purchase of even a few hundred dollars could take years to pay off. What may have originally seemed like an advantage is actually a minimum payment trap that could keep you in debt for much longer than you planned.

Using our example from above, it is easy to see how quickly a credit card balance can spiral out of control if only the minimum payment is made each month. On a $2000 balance with a 2% minimum payment and interest rate of 18%, it would take 24 years to pay off your credit card. Over that period, you would pay $4,396.57 in interest, for a total of $6,396.57, over three times your original balance!

If instead of making the minimum payment, you chose to make a payment of 5%, it would only take you 6 ½ years to pay off your balance. You would end up paying less than $800 in interest, as opposed to thousands of dollars. Paying off whatever you can afford now can literally save you thousands of dollars on your credit card bill in the long run.

Contact a New Orleans Debt Negotiation Attorney

Long-term debt can be devastating for your finances and can affect all aspects of your life. To learn more about how you can escape from debt and start working towards a more secure financial future, please contact the New Orleans bankruptcy lawyers of Kervin & Young, LLC today at 504-599-5906.