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How making minimum credit card payments enslaves you in debt

Everyone has done it at some point or another — made only the minimum payment on an open credit card account. Some pay only the minimum every month, and feel grateful they can afford even that.

But if you have been eking out only the minimum payments, you soon will be mired in debt even if you aren't right now.

How minimum payments trap consumers in debt

Paying only the minimums doesn't put much of a dent in consumers' outstanding balances, which equates to paying more interest charges. This, of course, boosts the credit card companies' profits substantially.

The Consumer Financial Protection Bureau (CFPB) reports that, nationally, roughly 15 percent of consumers pay only the minimum on their credit accounts each month. This formula is designed to keep consumers deeply in debt to their creditors.

Why have minimum payments shrunk?

If you ran up credit card debt 40 years ago, most of your creditors required payments of no less than 5 percent of the total balance. While minimum payment amounts dropped with account balances even though interest accrued, big balances could take decades to pay off only making the minimum payments.

Then a financial services consultant got an idea. "Minimum payments] had been 5 percent," the consultant stated in 2004 in an interview with PBS Frontline. When he convinced a major issuer to reduce the minimum to 2 percent, the "lower payments gave customers more flexibility, [but] of course the bank has a potentially much more profitable account."

The profitability quickly convinced creditors to implement across-the-board changes. In the early years of the 21st century, 2 percent minimums had become the norm.

The feds get involved

Eleven years ago, new Federal regulations took effect. Now, minimum payments were required to cover part of the principal balance, fees and accrued interest. Some creditors increased their requirements, yet the minimum payments were still far lower than in the 1970s.

Today, most credit card companies charge only 1 percent of account balances, in addition to fees and interest charges. Most charges have a fixed minimum payment amount, which is frequently set at $25. But consumers are still the big losers in the debt game. Here's why:

  • The repayment period is extended. For example, consumers can pay off a $10,000 debt over 30 years — the same timeframe in which you can pay off a house.
  • You pay more in interest. With the exception of new credit cards promoting 0 percent annual percentage rates (APR), this is unavoidable.
  • Your debt appears affordable even though it is potentially unsustainable over time.
  • Your credit takes a ding when your available credit is too low and your balances are too high.

Take charge of your debt load

Of course, the best debt management strategy is to pay off your balance each and every month. But this may not always be possible. Still, consumers striving to get out of debt can alternatively pay 5 percent of the balance instead of the minimum, just as they would have back in the 1970s.

For some, that will still not be sufficient to escape the morass of debt. These consumers may wish to explore other financial strategies, including filing for Chapter 7 or 13 bankruptcy protection.

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