Paying the bare minimum on credit card debt can cost you

When you’re carrying a credit card balance, paying at least the minimum due each month is certainly a start. If those payments aren’t making your overall budget feel squeezed, you have all the more reason to put payments on autopilot and not think about the total cost of your debt.

But that inertia can cost you, especially with average credit card interest rates reaching 20.4% as of November 2022, according to the Federal Reserve. NerdWallet’s 2022 American Household Credit Card Debt Study, conducted by Harris Poll, found that U.S. households with revolving credit card debt are paying an average of $1,380 in interest this year.

There is good news, though: Dedicating even a small amount of time and money to changing up your payment habits can be well worth the effort.

Interest adds up and up

While the slow drip of interest payments might feel manageable month to month, thinking of your debt this way ignores how much interest adds up over time.

“If you’re only able to make minimum payments and you’re paying the average interest rate, it could cost you thousands over many, many years if you’re paying down a balance of $10,000,” says Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling. “It’s stunning how much it could cost you.”

Since minimum credit card payments are generally around 2% of the total amount owed, you’d make $200 monthly payments on that $10,000 balance, and your interest rate is 20.4%. It’ll take around 9½ years to become debt-free, and you’ll spend $12,508 in interest — more than doubling the total cost of your debt.

But that’s assuming you don’t take on additional debt. If you’re still using that card for new purchases, the debt cycle will pile up. It’s best to switch to using debit or cash for everyday purchases to avoid paying even more interest.

“You really want to sit down and look at the details that might make you uncomfortable, because it’s better to know than not to know,” McClary says.

Small changes yield big savings

There are two ways to lower the cost of your debt: increase the size of your payments and reduce the interest rate.

Going back to the example of the $10,000 balance, here’s the potential impact of upping your payments. Let’s say you felt comfortable committing an extra $10 a week, or $40 a month, toward debt. By paying $240 per month instead of $200, you’ll spend $4,966 less on interest and pay down your debt nearly 3½ years sooner. Even if you’re already making more than the minimum payment, paying even more than that can make a tangible difference.

Or, perhaps you can negotiate a lower interest rate with your credit card issuer. Reducing your interest rate from 20.4% to 18% (while still paying $200 a month) will lower your interest by $3,886 and shorten your repayment time frame by a year and seven months.

Here are some ways to lower your interest rate:

• Call and ask: Call the number on the back of your credit card to inquire about your eligibility for a lower interest rate. If the answer is no, you won’t be penalized in any other way just for asking.
• Move debt to a lower-interest option: If you have good or excellent credit, consider a balance transfer credit card with a 0% interest rate promotion. Otherwise, a personal loan could offer a lower interest rate than your credit card.

“It’s that compound interest that’s killing people at higher interest rates,” says Delia Fernandez, a certified financial planner and the founder and president of Fernandez Financial Advisory LLC in Los Alamitos, California. “You want to be the one who understands it and earns it. You don’t want to be the one who pays it and makes credit card companies rich.”

Related link

NerdWallet: 2022 American Household Credit Card Debt Study https://bit.ly/nerdwallet-average-credit-card-debt-household