You’ve got $10,000 in credit card debt, but only have to pay a 2% minimum payment. Sweet, right? Wrong. At 14% interest—which is the current average consumer credit card rate—it’ll take more than 36 years to pay off that debt if you only pay the minimum. Not so sweet, right?
In that scenario, you’ll end up paying more than $13,000 in interest alone. Because of compounding interest, the interest charged is added onto the original principal so that it, too, can accrue interest. Because the minimum payment is calculated as a percentage of your current balance, that payment goes down. Thanks to compounding interest, however, you end up paying considerably more over time.
Credit card companies love when you only pay the minimum payment because they know they will end up with more money and have you as a customer for longer. The best strategy is always to pay the entire credit card balance as soon as the bill comes but, failing that, you should always pay more than the minimum required. If you make $200 monthly payments on that same $10,000 debt, you'll pay it off 30 years sooner. You will also shave your total interest paid to just over $5,000.
Earlier is always better when it comes to paying credit cards. Even if you can’t commit to a fixed monthly payment, commit to paying more than the minimum payment. Even a few dollars more can translate into years of savings.
Whenever you find yourself with extra money, pay off your credit card. Getting a tax refund? Pay off the card. Got some birthday money? Pay off the card. You can never pay off a credit card too soon, because it always saves you in the long run.
One commitment you need to make, however, is to stop charging on your credit card. When you’re already in a hole, you’ve got to stop digging. The more you add to your credit card balance, the more interest is accrued and the longer it’ll take to pay off.