Have you recently noticed that you’re making your minimum payments every month, yet you notice that your total debt is only creeping down ever so slightly? So, what’s the problem here?
Well, minimum monthly payments are just that. They’re the minimum you should be paying on your owed debt. If you look at your loan or credit card statement, there should be a repayment schedule that shows or states how long it’ll take you to be debt-free if you stick to only minimum payments. Depending on the size of your debt, that repayment schedule is often years or decades long.
Did you catch that? We must repeat that for everyone because it cannot be emphasized enough. If you pay just the minimum payment on your debt, it can take years to pay it off.
A Minimum Payment Example Broken Down
Minimum payments are not the answer to quickly and effectively getting out of debt. Let’s take a real-life example to illustrate how slow the minimum payment process can be.
In 2023, the average American adult had a credit card balance of $6,501. So, let’s say an individual has a $6,000 credit card balance with a 21% APR.
If you only make minimum payments on this balance, you’ll actually pay a total of $14,873.43. Even more shocking, the total interest you’ll pay is $9,874.73, which is more than your original balance. And it will take you 24.75 years to become debt-free.
Imagine taking 2.5 decades and paying almost 2.5 times the original debt amount to eliminate a $6,000 credit card balance!
Hopefully, seeing the numbers explained this way truly showcases how minimum payments are not the smart financial decision to make.
The Cons of Making Minimum Payments
There are several drawbacks to making only the minimum payments on your debt, including:
- You will pay the maximum possible interest
- Your debt payoff will take incredibly long
- It can negatively impact your credit score as your credit utilization will remain high
Creditors get the most out of you when you stick to minimum payments, so you’ll never hear a complaint from them if this is your approach. In fact, they might even offer you a credit balance increase in hopes that you’ll dig yourself further into debt!
Minimum Payments are Not a Long-Term Solution
Of course, it’s important to mention that minimum payments are sometimes necessary. Sometimes, people may be struggling financially and simply don’t have room in their budget to make more than a minimum payment. If that’s the case, continue making the payments and try to evaluate how you can get out of the minimum payment cycle. Perhaps you can look for a side hustle to bring in extra money or cut some discretionary spending out of your budget.
Whatever the case, the goal here is that you’re not stuck making just minimum payments for very long.
Additionally, note that making minimum payments is better than missing payments entirely. Every time you miss a payment, you run the risk of several financial setbacks, including:
- A hit to your credit score
- Additional fees or penalties
- An increase in your APR on the outstanding debt
- A cut-off from your credit accounts
Minimum payments aren’t the long-term answer, but they are the least you should always do. They keep your creditors happy and ensure that your debts aren’t sold to a collection agency.
How to Get Out of Debt
Carrying debt can feel all-consuming, so it’s unsurprising that 65% of Americans feel their financial difficulties are piling up to the point they can’t overcome them. But no matter how dire your debt situation may seem, know that you don’t have to live in a financial chokehold.
There are steps you can take to get out of debt, including:
- Make more than the minimum payment whenever you can. Even if it’s just an extra $50 or $100 a month, this money goes entirely to the principal balance and will help reduce your debt quickly.
- Create a budget and stick to it.
- Consider downsizing, relocating, or making other budgetary cuts to reduce your monthly spending.
- Sell assets and goods that you aren’t using to pay off your debt faster.
- Find extra ways to earn income to put towards your debt repayment.
- Transfer your credit card balance to a 0% APR credit card.
- Consolidate multiple debts into one loan.
- Use free debt counseling services where a professional can evaluate your current circumstances and build out a plan for you.
- Negotiate with your creditors to settle a debt repayment plan that is less than what you owe. Debt settlement companies can assist in this process.
- Considering bankruptcy might be the right solution for a fresh start in severe financial situations.
Living Beyond Debt
Debt recovery is possible; it just takes hard work and dedication. The first step is to make a plan to make more than the minimum payment as soon as possible. Remember that minimum payment may feel affordable in the moment, but it’s more costly than it seems!
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