Credit card minimum payments are typically between 2% to 5% of your credit card balance. On a credit card with a $1,000 balance, your minimum payment will be anywhere from $20 to $50. Even though paying the minimum payment might be convenient, it’s not the best way to pay off your credit cards for several reasons.

Paying the Minimum Takes Longer and Costs More

When you make minimum payments on your credit card, you’re only making small dents in the balance. It’s like moving a mound of sand using only a spoon. It will take a very long time. For example, if you make minimum payments on a $5,000 credit card balance (with an 18% interest rate) it will take you 23 years to pay off your credit card balance.

The reason that minimum payments don’t do much for your credit card balance is because most of the payment goes toward the monthly finance charges. So your balance goes down, very slowly. The higher your balance and interest rate, the longer it takes to pay off your credit card with minimum only payments.

In the 23 years you spend paying off your $5,000 credit card balance, you will end up paying more than $13,000 in total (with an 18% interest rate). That’s more than double the amount of the original balance. You’ll end up paying more than $7,000 in interest alone.

If you doubled your minimum payment and paid $250 toward your credit card balance each month, you’d pay off the balance in 2 years and only pay $989 in interest. You save more than $6,000 sending just $125 more each month. Think of all the things you can do with an extra $6,000.

Your Credit Card Balance Could Go Up

In some situations, your credit card balance could go up instead of down when you’re making minimum only payments. That can happen when you have a high interest rate and a low minimum payment. For example, if you have a $1,000 credit card balance at the default rate of 30% (the rate charged when you make a late payment or exceed your credit limit) and a 2% minimum payment, your finance charge would be $23 while your minimum payment would be $20.

When your minimum payments don’t cover interest, your balance goes up and so does your interest charges. This type of situation makes it impossible to pay off your credit card balance. You must pay more than the minimum to get your credit card balance to go down. Pay attention to your billing statement, especially your finance charge and minimum payment to see if you’re in this minimum payment trap.

Your Credit Score Could Suffer

If your credit card balance is high compared to your credit limit, making minimum payments is probably hurting your credit score. Part of your score is based on your credit utilization, the ratio of your credit card balance to credit limit. Low credit card utilizations are better.

Keeping your balance below 20% of your credit limit is best. If you’ve already exceeded that 20% credit utilization and you’re only making minimum payments on your credit card, it will take a long time for your credit score to recover. In the meantime, you have new applications for credit cards and loans denied because of your high credit card balances and low credit score.

Calculate Your Minimum Payment Timeline

If you want to get a rude awakening about how much minimum payments are costing you, use an online credit card payment calculator. These calculators tell you how much interest you’ll ultimately pay and how long it will take to pay off your balance when you pay the minimum only. You’ll also be able to compare minimum payments to a higher, fixed monthly payment to see how much money and time you’ll save by increasing your monthly payment.

• Bankrate
• CreditCards.com
• Dinktown.com (lets you compare minimum payments on multiple credit cards)

Is It Ever Ok To Pay the Minimum?

You may have an excuse to make minimum payments on your credit card if you’re working on a debt repayment plan where you focus on paying off one credit card at a time. With this type of credit card payoff you send a large, lump sum payment to one of your credit card until that card is completely repaid. Meanwhile, you send the minimum payment to all your other credit cards. Then, once one credit card is repaid, you begin making lump sum payments to another credit card.

Making the minimum payments in this situation is ok because you’re actively working to pay off your credit card debt. In any other situation, minimum only payments will prove to be expensive, time-consuming, and detrimental to your credit health.

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You may be able to live with credit card debt for awhile, but if you don’t start paying it off soon, the debt may become too much to handle. If you think you can continue making minimum payments on your credit card debt forever, think again. You never know when your credit card issuer will raise your minimum payment, making your credit card payments unaffordable. If that’s not enough to convince you to pay off your credit card debt, here are seven reasons you should pay off credit card debt.

To raise your credit score. A large part of your credit score – 30% to be exact – is based on your credit card debt. The higher your credit card balances are compared to your credit limit, the lower your credit score will be. A low credit score will limit your ability to get approved for new credit cards and loans. It could even cause you to pay higher interest rates on any credit cards and loans you get approved for. As you pay off your credit card debt, your credit score will rise and you’ll begin to see the benefits of having a better credit score.

To avoid paying more interest. There’s a cost to keep a balance on your credit card beyond the grace period. Each month you have a credit card balance, you’ll pay interest charges. The longer it takes you to pay off your credit card debt, the more interest you’ll pay. Of course, paying off credit card debt means you’re no longer padding credit card companies’ pockets with interest payments.

To keep more cash for yourself. Think about how much you’re spending on credit card bills every month? Now imagine being able to keep that money to spend on something for yourself – something you own free and clear, no payment, no interest. Paying off your credit card debt frees up cash that you can start putting toward your retirement, a family vacation, an emergency fund, or a new television. You’ll have to sacrifice some cash in the short term to pay off your credit card debt, but if you think of it as an investment, you’ll realize that you’ll have more money to spend with your credit card debt out of the way.

So you can retire comfortably. Once you retire, the last thing you want to worry about is paying off a ten- or twenty-year old credit card balance. Many retirees have a limited income that barely covers the mortgage and other living expenses. Adding credit card debt makes retirement more difficult, especially if you’re living on a fixed income. When you retire, you’ll want to pay as few bills as possible. Pay off your credit card debt while you’re still gainfully employed and you’ll be able to enjoy your retirement much more.

To reduce the amount of money you owe. As long as you owe money to someone else, they have a certain amount of power over you. Being indebted to someone, especially a large corporation like a credit card company, can be a scary feeling. The sooner you pay off your credit card debt, the sooner you can be free of lenders. You’ll have fewer people sending bills to you every month requesting you send them money.

So you can borrow money for a house, car, or business loan. When you apply for a loan, the bank will look at how much credit card debt you have to gauge whether you’ll be able to make your loan payments. If your credit card debt is too high, the lender will estimate that you won’t be able to handle your loan payments and will probably deny your loan application. Paying off your credit card debt will improve your chances of getting loan approval.

To escape ever-changing credit card terms. As long as you have credit card debt, you’re subject to the credit card issuer’s terms and conditions, which can change at any time. Credit card issuers can raise your interest rate, impose new fees, shorten your grace period, or any number of things that make it more expensive and less convenient to have credit card debt. The only way to escape the credit card issuer’s grasp is to pay off your credit card debt and stay away from credit card debt for good.

Once they’ve repaid their credit card debt, many people swear they’ll never use debt again. You don’t have to go to this extreme to avoid credit card debt. You can continue using credit cards for the protection and convenience, but pay your balance in full each month to avoid the negative side effects of having too much debt. That way you take advantage of credit card benefits without dealing with the costs.

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You’ll pay a cash advance fee.

Cash advances aren’t free. A cash advance fee will be added to the balance of your cash advance. Credit card cash advance fees are calculated in one of two ways (or a combination of the two ways). You might be charge a cash advance fee that’s a percentage of the cash advance. The percentage is typically between 2% and 4%. That’s $2 to $4 for every $100 in cash you take out.

Some credit card issuers charge a flat fee regardless of the amount of the cash advance. For example, you might be charged a $10 cash advance fee regardless of whether you withdraw $100 or $1,000.

Finally, some credit card issuers use a combination of both these methods. For example, the card issuer might charge a fee that’s 3% of the cash advance or $5, whichever is greater. The minimum cash advance fee guarantees the card issuer receives a certain amount of money for your cash advance just in case, the percentage method is low.

You’ll pay an ATM fee.

If you use another bank’s ATM, you will probably be charged an ATM fee between $2 and $5. This is the same fee you’d pay if you used your check card with withdraw cash from another bank’s ATM. If your credit card issuer is a bank with ATM’s you may avoid the ATM fee by using your bank’s ATM. Otherwise, the fee will be added to your cash advance balance.

You’ll pay a higher interest rate.

One of the things that makes cash advances a bad idea is the higher interest rate. Cash advances nearly always have a higher interest rate than the interest rate that’s applied to your purchases. This means you pay more money for taking out a cash advance than you would making a purchase.

The cash advance interest rate is usually a few points higher than your purchase interest rate. Look at your credit card billing statement to learn your cash advance interest rate.

Interest starts accruing immediately.

Unlike purchases, cash advances don’t have a grace period, so interest starts being added to your balance starting on the day you take out the cash advance. By the time your billing statement comes in the mail, you’ll already have a finance charge on your cash advance, even if you started the billing cycle with a $0 balance.

Credit card cash advances are paid last.

If your credit card has multiple balances with different interest rates and a cash advance is one of them, your cash advance will probably be paid last.

Anytime you make a payment above the minimum, your credit card issuers can apply the payment to whichever balance it chooses. Card issuers usually apply any payment above the minimum to balances with the lowest interest rate, which is usually your purchase balance. Your cash advance balance, which will have a higher interest rate, may not have a payment applied to it. As a result, your cash advance balance may increase after finance charges are added. The longer it takes to pay off your lower interest rate balance, the higher your cash advance balance will become.

This method of applying payments to the balance with the lowest interest rate can only be used for a short period of time. After February 22, 2010, a new credit card law will require credit card issuers to apply any above-minimum payment to balances with higher interest rates.

How to Avoid a Cash Advance

These are some ways to avoid a credit card cash advance:

• Ask your employer for an advance on your paycheck. If there is a fee for an advance on your paycheck, it will pale in comparison to cash advance fees.
• If you can’t get an advance on your paycheck, consider working overtime to increase the amount of your next paycheck. Make sure you get approval ahead of time.
• Sign up for your bank’s overdraft protection. With overdraft protection, your bank uses a line of credit to cover transactions for which you don’t have enough money in your checking account.
• Borrow money from a family member or friend. They may not charge a fee at all for loaning money to you.
• Get a small loan from your bank. A loan will have a lower interest rate than a cash advance and will cost less if you pay it off quickly.
• Build an emergency fund and use it instead of borrowing money when you run into a financial emergency. An emergency fund must be planned and built well ahead of time.
• If you need money immediately, sell some items on eBay or Craigslist to earn cash.

If You Must Use a Cash Advance…

Realize that cash advances are expensive. Use a credit card that doesn’t have a balance so you can pay your cash advance back quicker. You can reduce the cost of a cash advance by paying it back by the time the billing statement comes rather than over a period of time.

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While there isn’t an obvious, in-your-face type of way to tell whether you have too much credit card debt, there are some signs to let you know it’s time to change your credit card spending habits. Think about how you’re currently using your credit cards as you read through this list. If any of these things apply, you may be in trouble with credit card debt.

1. Your debt-to-income ratio is high.

Numbers don’t lie. Your debt-to-income ratio indicates the amount of your monthly income that goes toward credit card debt payments. To figure out your debt-to-income ratio add up the amount you spend each month on credit card payments and divide it by your monthly income. If the number is above 10%, then you have too much credit card debt.

2. You always make the minimum credit card payment.

Making the minimum payment lengthens the amount of time it takes to pay off your credit card debt. Not only that, it increases the amount of interest you ultimately pay. If you can only afford to pay the minimum amount due on your credit cards, then you have too much credit card debt. To raise your monthly payment amount, you’ll have to cut back in other places. That way, you can afford to pay off your credit cards and get rid of credit card debt.

3. You frequently use balance transfers to avoid making credit card payments.

Balance transfers are a good way to take advantage of better credit card terms, like a lower interest rate. However, they’re not designed to help you skip out on your credit card payments. If you’re transferring credit card balances to keep from having to make a payment on your credit card, you probably have too much debt. And if you don’t already have more debt than you can handle, you will soon as the balance transfer fees make your credit card balances go up

4. One or more of your credit cards is maxed out.

Maxing out your credit card happens when you charge your credit to the maximum credit card limit. This is never a good idea because it hurts your credit score. Not only that, maxed out credit card balances are more difficult to repay. Several maxed out credit cards are surely a sign that you have too much credit card debt. The only good thing about a maxed out credit card is that your balance can’t go any higher, so you won’t continue to loan yourself with more debt than you can handle.

5. You’ve been turned down a loan because your credit card balances are too high.

Banks don’t want to loan money to you if you have too much credit card debt because, chances are, you won’t be able to repay what you’ve borrowed. The bank may not immediately tell you you’ve been turned down because you have too much credit card debt. Instead, they’re required to send you a letter letting you know the reason you’ve been turned down. If the letter indicates you were denied because your credit card balances are too high, there you have it.

6. You don’t know how much credit card debt you have.

As their credit card balances rise out of control, many people go into denial about how much credit card debt they have. If you avoid adding up your credit card balances because you’re afraid of the truth, there’s a good chance you have more credit card debt than you can handle. But, when it comes to credit card debt, ignorance is not bliss. The sooner you face your true credit card debt, the better.

7. You can’t afford to pay your balance in full every month.

The best way to avoid credit card debt is to pay off your credit card balances every month. That way, you never have to deal with credit card debt. If your balances are too high to pay off every month, you have too much credit card debt. When you make credit card purchases, remember to keep them at a level that you can easily repay when your credit card statement that comes. That way, you avoid the lingering balance that can become credit card debt.

8. You lie to friends, family, and your spouse about how much you’re spending with your credit cards.

People with credit card debt not only lie to themselves, they also lie to the people around them about how much credit card debt they have. If you find yourself taking extreme measures to keep people from finding out about your credit card habits, you may have too much credit card debt.

Facing Your Credit Card Debt

The first step to dealing with credit card debt is acknowledging that you have it. Sit down and add up your credit card balances, so you know how much debt you actually have. Then, make the decision to stop using your credit cards. That way your credit card debt won’t keep going up. Finally, start paying back your credit card debt. You may have to reduce your spending in other areas, but it’s worth it if it means you’ll finally be rid of credit card debt.

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1. Charge what you can afford to repay.

The easiest way to avoid credit card debt is to keep your purchases at an affordable level. It’s when you start charging things you can’t afford that you begin to encourage credit card debt. When you charge more than you can afford, it takes longer to pay off your balance.

2. Get the right credit card.

There are different credit cards for different spending habits. Before you apply for a credit card, look at its features – the annual fee, the grace period, the interest rate – to see if it meets your needs. If you get just any credit card out of desperation, you’re more likely to end up in credit card debt.

3. Know your interest rate.

Your interest rate affects the amount you pay for credit. The higher your interest rate, the higher your monthly interest charges, the fee known as a finance charge. Your interest rate can be incentive to pay off your credit card balance. For example, if you have a high interest rate like 29%, you’re more like to pay off your credit card balance than if you have a lower interest rate, like 4%.

4. Read the fine print.

Often buried in the text of your credit card agreement are details that could help you avoid credit card debt. For example, the penalties associated with going over your credit limit or making a late payment. There may be fees on your credit card that you wouldn’t realize unless you read your credit card agreement.

5. Understand the consequences of credit card debt.

Knowing that credit card debt has serious effects might be enough to steer you away. People who are deep in credit card debt have been known to be severely depressed and devastatingly, some commit suicide. There are less extreme, but still negative effects of credit card debt. Being in credit card debt keeps your money tied up. As long as you owe the credit card companies, you’ll never be able to spend your hard earned money on the things you want.

6. Treat your credit card more like cash.

Studies show that people are less likely to spend cash compared to a credit card. That’s because we feel a certain pain when we have to separate with our cash. While you don’t immediately lose cash when you use a credit card, you’ll eventually have to spend money paying down your credit card bill. If you spend with your credit card the same way you would with cash, you’ll keep your credit card balances at a reasonable level that’s easy to repay.

7. Keep only a few credit cards.

The more credit cards you have, the more credit you have available for using up. Having several credit cards makes it easier to charge up balances that you can’t afford to repay. If you have more than one credit card, “what you can afford to repay” should the split among all your credit cards. For example, if you can only afford to repay $300 in credit card debt a month and you have 3 credit cards, then you can only afford to charge a maximum of $100 on each of your credit cards. Limiting your credit cards makes it easier to avoid credit card debt.

8. Pay your bill on time.

Late payments have many consequences. You get charge a late fee. Your interest rate could go up. The late payment gets updated on your credit report. Your next minimum credit card payment will be even higher. You’ll have to pay the minimum payment from the previous month, the minimum payment from the current month, plus a late payment fee. The more delinquent you become on your credit card, the harder it is to get caught up because your minimum payment continually increases.

9. Recognize the signs of credit card debt.

Often people could avoid credit card debt if they only knew they were headed that way. You might be on the road to credit card debt if you’re only making minimum payments on your credit card, you’re charging everyday items, or you’re using balance transfers to avoid making a credit card payment. If you recognize you’re headed toward credit card debt, change your spending and payment habits to get control of your debt before it grows too large to handle.

10. Avoid credit cards.

Of course, the most obvious and easiest way to avoid credit card debt is to avoid credit cards all together. If you never use a credit card you don’t get the chance to accumulate any credit card debt. Of course, we need credit cards to help build a good credit history, so completely avoiding credit cards may not be feasible. Since that’s the case, rely on the other nine steps talked about above to help you avoid credit card debt.

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