How Doing the Bare Minimum With Debt Is Costing 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.

“Our pace of life has gotten really busy,” says Delia Fernandez, a certified financial planner and the founder and president of Fernandez Financial Advisory LLC in Los Alamitos, California. “There’s always something that’s more important, particularly for these people who are not in a financial crisis.”

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. 

Consider the total — not monthly — cost of interest

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 nine and a half 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. “Even if your budget is balanced each month and you’re making payments on time, you really need to know how much your debt is costing you.”

Small changes can add up to 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 three and a half 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. In the worst case, the answer will be no, but 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. That can give you up to nearly two years to pay down debt interest-free. Otherwise, a personal loan could offer a lower interest rate than your credit card. 

Larger payments + lower interest = The ultimate power move

To really cut down on the cost of debt, increase your monthly payment and seek a lower interest rate.

If you paid $240 a month toward a $10,000 debt at 18% interest, you’d slash $6,697 off your total interest payments (compared to where you started) and pay down your debt nearly four years sooner.

“It’s that compound interest that’s killing people at higher interest rates,” Fernandez says. “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.”