Why It’s Hard to Get Out of Debt With Only Minimum Payments

When your budget is tight for the month, low minimum credit card payments can give you some breathing room. However, you don’t want to make paying the minimum a habit. 

You might feel like you are chipping away at your debt total by paying the minimum required each month, but in truth, you are extending the life of your debt by many years — and thousands of dollars. 

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How Minimum Payments Are Calculated

Lenders calculate minimum payments based on a small percentage of your outstanding balance, usually around 1% to 3%, plus any interest and fees accrued during the billing cycle. 

Sometimes for smaller amounts owed, you can expect a flat dollar amount based on the lender’s fixed floor. 

For example, if you owe $1,000 on a credit card with a 20% APR and the minimum payment is 1% plus interest, your minimum payment will be $26.67.  

Calculations can vary between lenders, but expect it to cover at least part of the principal and all the interest charges.

READ MORE: What Is APR and Why Does It Matter?

What Happens When You Only Make the Minimum Payment?

Making the minimum payment on your credit cards feels easier when you are budgeting, but it comes with negative consequences. 

This is how the debt cycle starts, and it is easy to get trapped in overwhelming debt if you continue to carry a credit card balance from month to month. 

Here’s what will happen if you keep paying the lowest amount possible toward your debt: 

You’ll owe much more than you borrowed

Lenders don’t care how long it takes you to pay off your debt. They are only concerned that you pay the interest off. 

This is why most of your minimum payment will go towards interest, with only a small margin going toward the principal balance. 

Because of this, your amount owed total goes down slowly, and it feels like you barely make any progress, even after several months. 

How does this look in real life? 

Well, if you have a $5,000 balance on a credit card with an 18% APR, your minimum payment might be $125. Even if you didn’t take on another cent of debt and paid the minimum faithfully each month, you will have also paid $6,923.09 in interest. 

In other words, it would cost you $11,923.09 to borrow $5,000. 

You’ll be in debt a lot longer

Remember the $5,000 credit card example? That bill will take 22 years to pay off if you only make the minimum payments. And this is assuming you don’t add any more debt to the card for over two decades. 

You can see how a fun shopping spree or financial emergency can quickly become a debt jail cell. 

For the above example, if you paid $250 per month instead of the minimum $125, you would be debt-free in two years, saving yourself two decades of stress. 

Additionally, you will have paid $989.13 in interest charges — almost $6,000 saved. 

You’ll have a high credit utilization ratio

You're making regular, on-time credit card payments, so your credit score should be excellent, right? 

While a big chunk of your credit score is on-time payments (which can happen with minimum payments), another factor to consider is your credit utilization ratio. 

To calculate your credit utilization ratio, divide how much you owe across all of your credit cards by your total credit limit. 

For example:

• You owe $5,000 between two cards with a total credit limit of $10,000. Your credit utilization ratio is 50%. 
• You owe $10,000 between three cards, but your credit limit is $50,000. Your credit ratio is 20% and lower despite owing more debt. 

Ideally, you want this number to be under 30%. 

Sticking with minimum payments doesn’t allow you to decrease your debt owed, and therefore your credit utilization ratio can be stuck at a high percentage for years. 

How To Make More Than the Minimum Payment

Any amount you can pay over the minimum payment will be a win — even if it’s an extra $10 a week thrown at your debt. 

Try these strategies to make it easier to pay more than the minimum each month. 

Automatic payments

Setting up weekly payments can take the sting out of paying off your card. 

Many times when we wait to pay a lump sum at the end of the month, we feel like we have more month than paycheck. Automatic payments take the money out of your account before you miss it, especially if those funds were just going to an extra latte or new boots. 

If your minimum payment is $100, try paying $300 each month, then break that down into $75 per week. 

READ MORE: How To Pay Off Credit Card Debt

Sell unwanted items

There’s a good chance that your closet or garage is full of money, and you just didn’t realize it. 

Selling your unwanted clothes or dusty elliptical can give you extra funds to devote toward your debt.  

Debt snowball method

If you are juggling multiple credit card balances, the debt snowball approach can help. 

With this method, you pay the minimum payment on all of your cards except the one with the lowest balance. Then you devote more funds to the lowest-balance card in order to pay it off faster and get it off your list. 

Once it's paid off, you will have more funds to devote to the second-lowest debt. 

Check your budget

If paying more than the minimum payment feels impossible, you might need to reevaluate your budget. Look for areas you can cut — even if it’s just temporary. 

Expenses like your streaming services, subscription boxes, and gym membership can be put on pause so you have extra funds to throw at your debt. 

READ MORE: How to Budget: 5 Simple Steps

Debt consolidation

Using a debt consolidation loan can move all of your high-interest credit card balances into a single loan with a lower interest rate. 

This can simplify your payments and potentially reduce the total interest you pay over time. 

The downside to this money move is that you will owe a fixed amount each month, which will be much higher than your minimum payment. 

0% APR balance transfer

You can move your debt to a credit card that has a promotional 0% APR offer, in what’s called a balance transfer. 

The key here is you will need to pay off your balance before the promotional period is up, otherwise you’ll owe deferred interest and not be any further ahead. 

You can also expect to pay a 3% balance transfer fee.

FAQs

Does paying only the minimum hurt your credit score?

It could. You are helping your credit score by making regular, on-time payments, but you could also be hurting your score if your credit utilization ratio is too high. 

The more debt you have, the higher your credit utilization ratio typically is. 

What if I can’t afford the minimum payment?

If you can’t afford the minimum payments on your card, even after strict budgeting, you need to contact the credit card company. 

Many lenders offer hardship programs that may provide temporary relief such as reduced minimum payments, lower interest rates, or fee waivers. 

You might also need to pursue credit counseling to help you create a budget and enroll in a debt management plan (DMP) to consolidate your debts into a single monthly payment.

TL;DR: The Minimum Payment Trap

Paying only the minimum payment each month is a surefire way to lead yourself further into debt. 

You’ll end up paying way more than you borrowed, take longer to pay it off, and you could even damage your credit score.

For more money management tips to keep you debt-free, check out these episodes of the Erika Taught Me podcast:

• Money & Investing Pitfalls To Avoid
• How To Budget For Beginners
• Get Past Your Money Mistakes

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