Minimum payments won't dent high-interest debt

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 for the expert

Dear Credit Guy,
I have a credit card with balances at varying rates. I thought that when you make a minimum payment, the first thing that gets paid is ALL interest accrued. Next, the balance that carries the lowest rate gets paid. What is happening to me is the interest accruing at the lowest rate is being paid off and the interest accruing at the highest rate is being added to the balance carrying the highest rate. So the balance that carries the high rate of interest is increasing even though I have not made any new purchases. Is this correct? -- Ed

Answer for the expert

Dear Ed,
The biggest problem I see with your situation is that you are only making minimum payments. The Credit Accountability, Responsibility and Disclosure Act of 2009 (better known as the Credit CARD Act) provisions regarding how payments must be applied only apply to those amounts paid in excess of the minimum payment. For this reason, and many others, I strongly encourage you to work out a way to make more than the minimum payment due each month.

How your minimum payment is calculated and applied to your balances will be spelled out in your cardholder agreement. If you, like most people, can't locate your cardholder agreement, the CARD Act has come to the rescue. Your card issuer is now required to include cardholder agreements in plain language on their company website. Should you be unable to locate it there, just call the customer service number on the back of your card and they will be happy to let you know where to get a copy.

Your high-rate balance will continue to increase until you begin to pay more than the minimum due or until your lower rate balance is paid in full. The CARD Act specifies that any amount paid in excess of the minimum amount due must be applied to the balance on the card with the highest interest rate. So, any amount, even $10 or $15 more than the minimum due will be applied to your higher interest rate balance. Of course, to make any significant decrease in the balance you will need to pay at least the interest accrued on that balance for the month and as much more as you can afford.

For example, let's say your highest interest rate balance is $5,000 at 24 percent interest. That balance is currently costing you approximately $100 in interest charges each month. To begin to see that balance decrease, you would need to pay at least $125 or more above and beyond your minimum payment.

Many people who make only minimum payments on their credit card balances are doing so because that is all they can afford. In numerous cases, people are stretching their budgets just to do that. Should you be one of these people, you may still have a couple of options to get that higher rate balance down.

Option No. 1 is to consistently make the same monthly payment as you did this month. This means that if you paid a minimum payment of say $175 on your last statement, continue to make a $175 payment every month even though your minimum amount due will be less each statement. Over time, that consistent payment each month will help you to increase the amount that is applied to your higher rate balance. See the  minimum payment calculator to see how that works with your debt.

Option No. 2 is to transfer your balance on your higher rate card to a new credit card or to a card without an existing balance. You will need to have a fairly good credit score to take advantage of this option, but if you have good credit, you might consider it. Shop around for a card with terms that make the most sense for the goal you are trying to accomplish: paying off the debt.

Take care of your credit!

See related: Study: Credit card statements 'virtually incomprehensible', Credit card agreements: Find yours online, A guide to the Credit CARD Act of 2009

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Updated: 11-24-2017