Minimum payments are designed to make you pay

If you’ve ever had a credit card, you know that you have a minimum amount that you must pay each month. This payment, known as a minimum payment, is designed to keep you paying interest on the card for as long as possible. It’s how the company makes money and how you stay in debt.

The problem with a minimum payment is that it’s no longer enough to cover your bill and to pay the interest you owe. Around 15 percent of consumers pay only the minimum amount, according to the Consumer Financial Protection Bureau, but that payment only covers a small portion of debt and may only cover interest.

When a credit card company has a lower minimum payment, it looks good on paper to the consumer. Sure, you can pay a monthly minimum of $25 for that $600 television, but it will take so long that it might cost you $1,000 by the time you pay it off. That’s what the company and banks want, since that’s profit for them.

Paying only the minimum on an account increases how long you have to pay on the card. For instance, if you have $10,000 on a credit card, then it can take up to 30 years to pay it off based on current minimum payments. What would be better is to have a minimum that paid off the balance in five years or less, since that keeps the consumer out of long-term debt and reduces overall interest.

If your card has small minimum required payments and falling behind on paying off the balanc, that becomes a problem. Late fees, increased interest and other changes to the bill can hurt you financially. If you’re overwhelmed, it’s possible to work with an attorney to negotiate your bills or to enter into bankruptcy in some cases.

Source: Forbes, “Credit Card Minimums: Perfectly Calibrated To Keep You In Debt,” Claire Tsosie, Nov. 04, 2016