Each credit card statement you receive includes a “minimum payment” amount along with transaction, balance and interest rate information.  Depending on other parts of your financial situation and your spending habits, you may be tempted to only pay the minimum amount shown on the statement.  As tempting as it may be, you should always try to pay more.

Credit card companies usually calculate the monthly minimum payment due as a percentage of your outstanding balance.  The percentage is usually more than the interest rate they are charging on your balance, but low enough to make the minimum payment amount seem attractive.

The cost of paying only the minimum can be high.

As you consider how much to pay each month, be sure you understand how all the numbers work.  To keep it relatively simple, let us assume you have an outstanding balance of $5,000, the annual interest rate being charged is 12%, or 1% per month, and the minimum payment is 2% of your outstanding balance.  If you only pay the minimum amount due of $100 per month, it will take 70 months to pay off the balance.  If you pay $200 per month, it will only take 29 months.

If your credit card has a higher rate of 18%, with a $100 payment each month, it will take 93 months to pay off the balance.  Paying $200 per month will result in the balance being paid off in only 32 months.  That’s a difference of 5 years!

As a practical matter, unless you stop using your credit card, each month you will have additional charges, more interest will be charged, and the time needed to pay off the balance will be even longer.

The key things to remember are that paying more than the minimum reduces your interest costs, and helps pay off the balance much faster.  It will also provide some peace of mind knowing you are doing the right thing.

Here are six ideas for finding cash to make more than the minimum payments and reduce your credit card balance faster:

  • First, stop using the credit card. This simple idea will result in more of your payment being used to reduce the balance that isn’t growing from new charges.
  • Second, consider getting a different credit card that has a lower interest rate. But be cautious about ads for cards that offer very low rates on transferred balances.  Often, the rate rises dramatically after a short period of time, or they charge high rates on new charges.
  • Third, you can always use cash for more of your purchases. Fewer monthly charges will bring your balance down faster.
  • Fourth, consider using some of your savings to pay down the balance. The rate you are earning on your savings is probably much less than what you are being charged on your credit card balance.  While no one likes the idea of depleting their savings, if you can reduce your interest expense by more than your interest income, you will end up ahead.
  • Fifth, consider some other type of loan. The interest rates charged on home equity loans, mortgages and even auto loans are probably less than what is charged to your credit card.
  • Finally, cut back on your total spending. Conserving some cash, even for just a few months, and using it to make larger credit card payments can make a difference.  It may even help you develop a good savings habit.

Interest rates charged on credit cards can be high.  Finding the right card and paying more than the minimum amount due each month can help keep your interest costs lower.