Paycheck Chronicles

The Minimum Payment Trap

Carrying credit card debt?  Making just your minimum payments?  While minimum payments can be a great way out of a rough patch, or a default payment for when things are going wacky, regularly making only your minimum payments on credit card debt is a dangerous habit.

Over at The Digerati Life, Silicon Valley Blogger has written an excellent post discussing the costs of making minimum payments on a larger debt (her example uses $37,000.)  While the results are scary, most people's debt doesn't start out at that size.  The average credit card consumer has a debt of $5,710 (per TransUnion, December 2008.)  So let's look at the minimum payment on a debt of that size, and assume that you've taken advantage of USAA or a military-affiliated credit union to get an interest rate of 8%.

Oh, my gosh...that $5,710 will take you 303 months to pay off...that is over 25 years!  And what if you can't get that great 8% interest rate, or you have it now but it resets to a higher rate?  Tack a few more years on to the time for repayment.  Ack!  But what if you could kick up that payment to 150.00 per month, and not add anything to the card?  You'd be done in 45 months - that's less than four years!

There are numerous credit card calculators available online to help you plan your escape from credit card debt.  You know I'm a big fan of visual reminders - if you need to make a chart and put it up in your room, do it.  Tell your friends that you plan to be debt free and ask them to keep on you about it.  Promise yourself a great reward when you're done.

Do whatever it takes, just don't fall into the minimum payment trap.  You'll be paying that debt off until your kids are your age!

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