Q: On the debt reduction calculator in goodmoneyhabits.com, there are 3 payoff options – one is “pay the minimum“. Why does the minimum payment stay constant instead of going down as I pay down my debt balance?
A: That is a great question! You are right – as you pay off your debt, your credit card company does reduce the minimum required payment (the minimum payment is calculated by the credit card company based on a percentage of the total amount you owe, so the more money you owe, the higher the minimum payment will be).
The problem with only paying the minimum amount required is that it takes a very long time to repay the debt, and you end up paying a lot of interest over a long period of time. Credit card companies make money on the interest they charge on the balance you owe , so they are very happy to let you pay the minimum amount (as long as it gets paid every month) because they make more money .
Your goal should be to pay down your credit card balance as quickly as possible so you can stop paying the high interest rate and start saving money instead of paying interest. This is why EDSA feels you should pay the initial minimum payment, even if the credit card company lowers the ongoing required payment after the first month.
So once you start paying a credit card bill at $X/month, keep paying that amount until it is paid off – no matter what the minimum payment is.