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Credit issuers give you plenty of time to pay off debt, but paying minimum payments will get you nowhere fast. We help you understand how to time payoff.
Almost everywhere you look on Debt.com, we promote the idea of paying off credit card debt as quickly as possible. Paying credit card debt off fast minimizes interest charges, improves your credit score and helps you avoid financial hardship. But what about the other end of the spectrum. If you don’t have the means to pay off your debt with a quickness, then how long do you have to pay off credit card balance?
This article explains how credit card debt repayment works and how long you can expect to be in debt. It can help you understand why you often need to find better ways to pay off your balances.
Credit cards are open-end debts with revolving payments. That’s the technical way of saying that you have an open credit line that you can borrow against, as needed. The payments are revolving, meaning they increase or decrease based on how much you owe.
This is different from a closed-end debt with installment payments – i.e. a loan. With a loan, you borrow a set amount of money that you must pay back within a set period of time. That time is referred to as the term of the loan. Since credit cards don’t have a term, there’s no set amount of time that you have to pay back your debt.
Since credit cards get paid back with revolving payments, you are expected to meet a minimum payment requirement each month. The creditor calculates the minimum payment requirement using a percentage that should be listed in your credit card agreement or credit card statement.
Most credit cards simply take a small percentage of your balance – somewhere between 2-5%. Other cards use a formula that takes 1% of your balance and adds in accrued interest charges. Each month the creditor calculates your minimum payment based on whatever formula they use. All credit cards also have a limit on how low your minimum payment can go – it’s usually either $15 or $25.
These minimum payment schedules are not designed to be an efficient way to pay back debt. In fact, they’re designed to keep you in debt as long as possible. Interest charges are how credit card companies make their money. So, each month that passes that you’re still in debt is good for them, because that’s another month that they can charge you interest and generate more revenue. But it’s bad for you because you’re basically just throwing money away thanks to this inefficient system.
The answer will shock you because it will take over half a decade to pay off your debt!
Let’s say you have a credit card with a fairly 2.5% minimum payment schedule. The APR on the credit card is 18%. You run up a $1,000 and you want to pay it off. So, you stop charging and make your minimum payments on time every month to get out of debt.
The problem is that if you only stick with the minimum payment schedule, it will take 62 months to eliminate the balance in full. That’s just over five years to repay a $1,000 balance. And that’s only if you stop making charges!
The reason it takes so long is that high-interest charges eat up over half of every minimum payment you make. So, you end up only paying off a few dollars of the principal (the balance you owe) with each minimum payment.
|Month||Minimum payment||Principal Paid||Interest Paid||Remaining Balance|
As you can see, you spend half a year making payments and you pay $150, but you only eliminate $62.50 of the balance you owe. The more you owe, the longer you’ll be in debt. If you have a $5,000 balance on a card with the same APR and payment schedule, then you’ll be debt-free in just shy of 20 years!
You can check how long it will take to pay off your balances using Debt.com’s free credit card payoff calculator.
If you don’t like the idea of paying your existing credit card balances off over the next few decades, then you need to find more efficient ways of paying off debt. You won’t get anywhere fast making minimum payments, so the obvious solution is that you should always pay more than the minimum.
But even so, you still have those high-interest charges eating into each payment you make. Let’s say you have that $5,000 balance and you don’t want to spend 20 years paying it off. Instead of making minimum payments, you commit to paying $150 per month every month.
You’ll still be in debt for almost 4 years! It will take 47 months to pay off the balance. The total interest charges will be $1,983.60, so you end up paying almost a quarter of what you charged in interest.
This is why Debt.com always recommends that you explore when you need to pay off credit card debt. If you owe more than $1,000 then at the very least, you should call your creditors to negotiate lower interest rates. Then you can plan to make larger payments that work for your budget. However, if you owe more than $5,000 then fixed payments aren’t going to be efficient. You need a better solution.
Creditors are more than happy to keep you in debt indefinitely as long as you keep up with your payments. But once you start to fall behind, it’s a different story. Then your credit card company has a very specific timeline for how long you have to catch up before they sell your debt to a collector.
The good news is that if you fall behind, your creditor will usually be willing to work with you to help you catch up. They don’t want to take a loss on your account, because that’s lost revenue for them. So, as long as you stay in contact and follow any commitments you make for repayment, they’ll usually give you extra time to catch up if you need it. But if you hide or don’t stick to commitments you make for repayment, you can expect that you’ll be headed into the hassle of collections.
Article last modified on August 7, 2019. Published by Debt.com, LLC