Most people would never buy something on credit, if they knew it would end up costing almost double. But that's what you're doing, if you only make minimum payments on your credit card bill.
According to a new survey by NerdWallet, nearly 2 in 10 of us is still paying off last year's holiday balances. One reason? Minimum payments
Jaci Sweet can relate. Her credit card debt started in college and ballooned out of control when she started her career and family- then got hit with unexpected medical bills.
"I had 3 cards and i was making minimum payments on all of them." Sweet said. "I didn't realize just how much i was paying. "
Her biggest credit card balance was $2,616.89. Interest rate : 13.74%. Minimum payment: $54.89.
Only making the minimum payment might make it easier for your to pay your bills on time and keep your credit in good standing, but Financial Education Specialist Norman Brickhouse breaks down the reality that shows how minimum payments work against you.
According to her bank statement, she's going to have 12 years repayment. Which is going to have a 4,791 dollar total payment, and her total interest charge is going to be 2,1 74 dollars." Brickhouse explained.
If she continues paying only the minimum, Sweet's total interest will be almost the same as her initial balance! But Sweet is escaping the minimum payment trap. She took one of Brickhouse's free financial education courses at Goodwill Industries in Tacoma and learned how to beat the minimum.
"I quit using the card and then I transferred the funds to a lower interest card." Sweet explained.
Sweet also learned tools to help cut her spending and put more money toward her credit card bill. By establishing and sticking to a budget, and finding ways to buy what she needs for less, she's been able to put $250 toward her largest balance, instead of just $50.
"I think you're doing a great job." Brickhouse told Sweet during a recent budget review. "You're certainly going to pay off your debt a lot faster."
By taking financial education classes Sweet learned what many consumers don't know about the minimum payment system.
"When you stop using your card and only pay the minimum, your credit card company reduces how much you have to pay every month- because your minimum payment is based on a percentage of your balance.
But the interest rate stays the same. So you're mostly paying interest and fees- which is why it takes so long to pay the balance off.
Sweet says she's shocked at how much she'll save by increasing her monthly payments as much as she can.
Remember-, her payoff with minimum payments would be 12 years, and more than $2,100 in total interest.
Here's what Brickhouse says will happen if she sticks to her plan:
"She's making a payment of 250 dollars, which would pay off her credit card in 11 months. Her total interest would be $131.80. That's over a 2 thousand dollar reduction. That's huge! That's game changing!" Brickhouse said.
With a new lease on her financial life, Sweet says even if you can't pay 5 times the minimum like she's doing- t's always in your best interest to try to pay more.
"It's like freedom, it really is. said Sweet. "It's an amazing feeling."
Many non-profit organizations and credit unions offer free financial education classes that can help you keep more of your money and be a smarter consumer. Here are some resources to help you find a class near you: