When you use a credit card, you can choose to pay off the amount that you spend over time, as long as you pay the minimum amount listed by your credit card provider for each statement.
Minimum payments are not an effective way to pay down a credit card balance. These payments basically service the debt to keep providers happy, and increase your risk of serious, ongoing credit card debt.
Case Study: Ali’s Minimum Payment Problem
Ali has an $18,000 balance on a credit card with an 18 % interest rate. Her minimum payment is 2% of the total owed, which works out to be $360 for the first month.
When Ali gets her credit card statement, she sees that if she only makes the minimum payment every month, it will take her 53 years and 1 month to pay off the balance of her credit card and cost her $66,974 in interest.
Ali decides to focus on paying off this debt as quickly as possible. By sacrificing a few luxuries, she calculates that she can put $900 per month towards her credit card debt every month. If Ali sticks to this payment amount, she will get rid of the debt in two years and save $45,795 in interest charges (compared to making minimum payments).