Q&A: Will my minimum payment decrease if I pay down card debt?

Great: Pay down debt to reduce interest. Better: Pay more than the minimum

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question

Dear Credit Guy,
If I have a credit card balance of $5,914.96 and pay $3,000 to lower it, will my minimum payment go down? Also, will I have less interest building up? – Bre

Answer

Dear Bre,
Reducing your balance significantly as you suggest will certainly result in lowering the amount of interest you incur each month. This action should reduce your monthly minimum payment significantly as well.

Most creditors require a payment of 1 percent of the balance plus interest each month. Not knowing what your interest rate is or the amount you are now paying in interest makes it difficult to give you concrete numbers.

However, for illustration purposes I calculated your payment using that rate – if you don't know your payment conditions, either, your account agreement or monthly statement will contain language similar to "your minimum payment is x percent of your balance or $xx, whichever is greater."

The rate I'm using for this exercise may be a little lower or higher if your lender's minimum payment requirements are different, but should be within the range of what you are now paying.

Calculating minimum payments on credit card debt

With that in mind and a 17 percent interest rate on your card, I used CreditCards.com’s minimum payment calculator to find that you are probably paying around $143 each month on the current balance of $5,914.96.

When you reduce the balance by $3,000 to $2,914.96, your minimum payment should go down to about $71 a month.

When you plug those numbers in the calculator, you will also see that it would take you 237 months – almost 20 years – to pay off your original balance making only minimum payments. During that time, you will pay almost $7,500 in interest alone.

 

Video: 3 things to know about minimum payments

When you reduce your balance to $2,914.96, it will take you 166 months – around 14 years – to pay off the balance, and cost you almost $3,200 in interest if you make only minimum payments.

Remember, this was calculated at a 17 percent interest rate, and your card may have a higher interest rate. Still, even at a much higher interest rate, both your minimum payment and your monthly interest charges would go down if you reduce your balance by $3,000.

The hard truth about minimum payments

The CreditCards.com minimum payment calculator I used shows you “the true cost of paying the minimum,” and that can be a real eye-opener for anyone with credit card debt.

The calculator's "table" tab shows how the minimum payment is reduced every month, resulting in a much longer payoff period.

A solution? Pay more than the minimum each month

My suggestion is to reduce your balance by $3,000, then figure out how much above the minimum payment you can pay monthly to pay off your debt faster.

CreditCards.com’s payoff calculator is a helpful tool to see what it would take to pay off your debt, and how much you can save by committing to a standard payment each month.

  • Making this work means that you cannot add to your balance during this time, unless you can afford to pay off any amounts you charge during the month in addition to the amount you have decided to pay.
  • For instance, if you commit to paying $88 every month on the card, but you charge $100 one month, the next payment you make should be $188.

This will take discipline and determination, but it will be the best thing you can do for your overall financial health.

Take care of your credit!

See related: Basics of minimum payments, Minimum payment survey: How much your issuer charges

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Updated: 12-15-2017