Why Making Small Monthly Credit Card Payments Is Not Helping Get You Out Of Debt

It is admirable to want to repay your debts. The majority of your creditors, however, do not make it easy for the average consumer who is struggling financially to repay debts. If you are struggling financially, your credit card interest rates are probably 25% (or higher). The credit card companies may lower your limit and will charge ‘over limit fees’ if your balance goes over that amount. If you make late payments, you may be charged additional fees.
When payments are made to a credit card company, they are usually applied to fees and interest first. If any funds are left over, they are then applied to the principal balance. How the payment is applied is why making small payment (paying what you can, when you can) to your credit cards does not help reduce how much is owed.
For example, if the interest your balance accrued last month was $200 and you make a $100 payment, your balance has not decreased and there will likely be additional fees added on because you did not make the minimum required payment. You can request that you credit card companies reduce or freeze interest and fees but it is uncommon that creditors will agree to this. Make sure you receive any such deals in writing, and do not rely on a telephone conversation as an agreement between you and the credit card company.
Take a look at the big picture. If, for example, all of your credit cards add up to $10,000 and all have an interest rate of 28%:
If you pay $250 per month it will take 117 months (almost 10 years) to pay them off. The total amount paid over that period of time will be over $29,250!
If you pay $400 per month it will take 38 months (over 3 years) to pay them off. The total amount paid over that period of time will be over $15,000.
You can try calculating your own numbers using an online calculator such as this one. The numbers listed above assume that no additional fees are incurred. As mentioned, however, additional fees for missed payments or for having an over-limit balance are often added. If these fees are added while you are trying to pay off your credit card balances, it will take higher payments or a longer period of time to pay them off.
The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.