Minimum payments primarily cover the cost of the interest charged, with only a small percentage of the payment going towards the principal amount you owe each month. This means you will always be left with credit card debt when you only make the minimum payment on your credit card.
The following two case studies show how different decisions to make minimum payments lead to more credit card debt for everyday people.
Case Study 1: Sarah’s Minimum Payment Plan
Sarah has a credit card with a $4000 balance and a purchase rate of 21.99% p.a. She decides to only pay the 2% minimum required, which is $80. Her interest charges for the remainder of the balance total $72, which means she has basically paid $8 off the original balance.
If Sarah continued to only make the minimum payment, she would pay $32,624 in interest over 67 years and 10 months. That’s more than eight times the original balance in interest charges, and over half a lifetime of repayments.
Case Study 2: Alicia’s Payment Plan
Alicia also has a credit card with a 21.99% p.a. interest rate and a balance of $4000. Her minimum payment is 3% or $120. Her statement’s minimum payment warning says it would take her 16.5 years to pay off the balance and cost $9369 at this rate.