Money or Interest you earn on savings and investments is good. Interest you pay on loans is bad and a drag on your financial health.

That’s the foundation of personal financial wellness - increase money sources, decrease money uses - or at least decrease debt and use your money for things you value, like food, shelter, entertainment and peanut butter ;). When you have debt (borrowed funds), you are paying interest, which basically increases your cost of whatever it is you bought using the funds you borrowed. Credit cards are notoriously the worst debt (just slightly better than loan sharks) you can carry, as they charge the highest interest rates of most funding sources - and often worse if you have a poor credit rating.

As written in a CreditKarma blog post: “According to the Federal Reserve’s data for the first quarter of 2019, the average APR across all credit card accounts was 15.09% — the highest rate recorded since 1994.”

Now, the “trick” used by credit card companies is to attract people to pay the “minimum payment” - since it appears to be a way to buy more than you can afford with a very minimal (ahem) payment per month. But there is danger here.

Minimum payments do seem attractive - they are usually the lesser of $15 - $35 or 1% - 3% of the outstanding balance. And if you pay that minimum, you can avoid late fees. But, this is the key, you still accumulate interest on the outstanding balance - which basically increases your debt and perhaps keeps increasing your principal amount on which that interest is calculated! You see where that goes? You NEVER escape your ever increasing debt! This is a disaster for financial well-being. It puts you in a perpetual state of paying 15% - 30% or more on an ever increasing balance due. That’s the most expensive loan you’ll ever have.

And that minimum payment is deceptive in another way… When you pay the credit card minimum payment, and won’t have to pay the late fee - you’ll still have to pay the interest due on the outstanding balance - which, if you followed above, is a super high rate against an ever increasing balance!

Now - if you have an extra $500 one month, you might consider your options. You can pay off $500 of credit card debt (or you can buy a venti Starbucks coffee! LOL) or you can put it in your savings account - or invest in a hot stock (‘cause that’s a sure thing ;). But math and history will tell you, paying off a 15%-30% credit card balance wins almost every time as the sure thing smartest option. You WILL save money taking that route.

We use our Credit Card Debt Paydown Calculator to go through some examples below…

Let’s look at one credit card debt situation, with THREE different payment scenarios and the resulting situation of interest paid and financial health:

Imagine having a $5,000 outstanding balance on a credit card with a 16% finance (interest) rate. Let’s unrealistically imagine that you stop buying things on that credit card ;) so the balance is only impacted by your payments and interest due.

SCENARIO 1 (the good? aka not great, but not too bad): You pay $500 per month plus the interest due on the outstanding balance. It will take you 11 months to pay off the credit card balance, and you would have paid only $5,653 over that time - just $653 more than the original amount due. That’s not so bad.

SCENARIO 2 (the bad - and common): You pay $100 a month plus the interest due on the outstanding balance. It will take you 6 years and 9 months to pay off the $5,000 - and you will have paid $11,197 over that time. That’s more than double your original amount due. bummer.

SCENARIO 3 (the UGLY - very ugly): You pay the credit card’s absolute minimum required payment of $35 plus the interest due on the outstanding balance. This is truly ugly, because in this case, you are accumulating additional principal - and not actually paying off your credit card - EVER. In the first 10 years, you’ll have paid $17,528 - with your outstanding balance INCREASING to $14,128 in year 10 - and still growing. This is truly a disaster for anyone’s financial well being - even if you are wealthy. You have paid TRIPLE your original purchase value and still owe another 3 times that value if you pay it now, in year 10 - meaning, overall, you have paid at minimum more than $31,000 to pay off purchases worth $5,000.

There’s loads of scenarios in between these three - but you should strive to be closer to the first two - and never ever approach the third. Paying off your credit card, where rates are typically three times higher than loan rates, is your best bet when thinking of how to spend available money. Take the time to look at and calculate alternative credit card payoff scenarios so you can get yourself out from under that debt burden as quickly as fiscally possible!