The Minimum Payment Trap

Paying the minimum monthly payment is an invention of the credit card companies to improve their bottom line, but maybe not yours.

According to a The New York Times article reprinted in 2008 from The Economist, a study demonstrated that when consumers were offered the opportunity to pay only a portion of their credit card bill, if a minimum payment was offered along with other payment choices, many chose the minimum payment option.

The credit card companies make money every time one of their card holders carries a balance past the due date, because they charge interest on that debt. The longer the card holder carries debt, the more money they make.

So they want to find a middle road, a strategy that will keep the card holder’s debt manageable but stretch out repayment as far into the future as possible, maximizing profits at your expense.

Double the minimum payment

In 2003, the office of the Controller of the Currency told banks that minimum payments had to cover all fees, interest owed and pay down some portion of the principal. Thus, the usual two percent minimum payment that existed prior to 2003 doubled to four percent. In effect, that move by the Fed meant that a borrower could cut the payoff time in half on their credit card debt, according to Gary Foreman, editor of The Dollar Stretcher.com.

The bottom line is that available credit is not an invitation to charge. As you begin to pay off your debts, you’ll likely be flooded with charge card offers. Don’t fall into the trap again. Think about your peace of mind and tear up the offers. Shred them. Start your road to financial freedom today.