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Why Are Half My Monthly Credit Card Payments Going Towards Interest?

We’ve all been there – excited to buy something new with our credit card, only to be shocked when the bill comes and half of our payment is going to interest. How did this happen? Well, let’s break it down step-by-step so you can understand exactly what’s going on.

How Credit Card Interest Works

When you make purchases on your credit card, you are essentially borrowing money from the credit card company. Unless you pay off your full balance by the due date each month, you will owe interest on the remaining unpaid balance. Here’s a quick rundown of how it works:

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  • You make purchases throughout the month and build up a balance
  • The credit card company calculates interest daily based on your average daily balance
  • If you don’t pay off the full balance by the due date, you’ll owe interest on the remaining amount
  • The interest gets added to your balance, so now a portion of your balance is the original purchases plus the interest

This cycle continues each month. So if you are only paying the minimum payment, you are likely just paying off a tiny bit of the original balance and the interest each month. This means the underlying balance is not going down much at all.[1]

Minimum Payments Are Designed to Keep You In Debt

Credit card companies make big profits from people who carry balances and interest charges. In fact, interest and fees accounted for $154 billion in revenue in 2018 alone![2]

That’s why the minimum payment is strategically set low – to keep you locked into debt for as long as possible. The minimum payment is usually equal to 2-3% of your total balance or $25-50, whichever is higher. This barely covers the interest charges each month, so the underlying balance is reduced at a snail’s pace.

For example, if you have a $5,000 balance at 20% APR and are making just the minimum payments:

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  • Your minimum payment would be around $125
  • Of that, about $83 goes towards interest
  • Only $42 actually pays down the principal balance

At this rate, it would take over 17 years to pay off the balance and cost $5,563 in interest charges. Yikes![3]

Tips to Pay Off Your Balance Faster

Clearly, only making minimum payments keeps you stuck in an endless debt cycle. Here are some tips to pay down your balance faster and reduce crippling interest charges:

  • Pay more than the minimum whenever possible – even an extra $10-20 can make a difference
  • Pay off highest interest cards first to save the most on interest
  • Ask for lower APR – call your credit card company to request a lower rate
  • Consolidate debt with a balance transfer card – transfer balances to a 0% APR card to save on interest for 12-18 months[2]
  • Use a debt payoff calculator – input your info to optimize a payoff plan
  • Cut expenses to free up more cash for payments
  • Consider debt management services for help negotiating lower rates

The key is having a strategy in place to aggressively tackle your balance. The higher the interest rate, the more important it is to pay off the debt fast before interest costs balloon out of control.

Should You Just Pay Off the Full Balance Each Month?

The only surefire way to avoid interest charges completely is to pay off your statement balance in full each month before the due date. Then you’ll never pay a cent in interest.

But this isn’t realistic for everyone, especially if you have a large unexpected expense that you need to pay over time. Car repairs, medical bills, home repairs, and job loss are some examples of surprise costs that could force you to carry a credit card balance.

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In these cases, just do your best to pay off as much as possible each month. Every extra dollar towards the principal is one less dollar wasted on interest. With time and discipline, you’ll eventually get that balance down to zero.

Should You Close Credit Card Accounts?

If you have multiple credit cards with balances, you may wonder if closing some accounts will help simplify payments. This can be effective in theory, but there are a few caveats to be aware of.

Closing an account:

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  • Could hurt your credit score temporarily by lowering total available credit
  • May cause other banks to lower your credit limits
  • Won’t make existing balances disappear

Before closing any accounts, pay down balances first to avoid utilization ratio issues. And consider transferring balances to a lower interest card rather than closing them out completely.

When to Seek Debt Relief

If you’ve tried everything but still struggle with high credit card debt, it may be time to seek professional help. Here are some debt relief options to consider:

  • Debt management plan: Work with a credit counseling agency to consolidate debt into one payment and negotiate lower interest rates.[4]
  • Debt consolidation loans: Pay off credit cards with a lower-interest personal loan.
  • Balance transfer card: Transfer balances to a 0% APR card.
  • Bankruptcy: Discharge eligible debt through Chapter 7 or Chapter 13 bankruptcy.

The key is acting sooner rather than later. Ignoring the problem allows interest to accumulate and make the debt even harder to overcome. Seek help from a non-profit credit counseling agency to go over your full financial picture and customize a plan to become debt-free.

The Bottom Line

Paying only the minimum payment on credit card bills can keep you stuck in an endless debt cycle. When you don’t pay off the full balance each month, interest gets charged on the remaining amount. This interest then gets added to your balance, so a portion of your minimum payment just covers the interest costs.

To pay off your balance faster, pay more than the minimum when possible, transfer balances to lower APR cards, cut expenses, and seek professional help if needed. With diligence and smart strategies, you can take control of your debt and reduce interest payments over time.

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