Getting Out of Credit Card Debt When You Can Only Pay the Minimums

by Gary Foreman

Getting Out of Debt When You Can Only Pay Minimum photo

How do you lower your credit card balances when you can only make minimum payments? See if this strategy can help you make a dent in your debt.

Dear Dollar Stretcher,
Due to a divorce a few years ago, I was the one that ended up with all the credit card debt. I can’t seem to get out from under. I looked into credit counseling, but because I am not terribly delinquent (I have been paying the “minimum” due on the cards most months), I did not qualify.

I need some help consolidating this debt. I haven’t used the cards except for emergency purposes (car maintenance), but my balances aren’t getting lower. The interest rates are too high. The minimum payments don’t seem to be much more than the interest. I will pay off my car in 10 months. That will free up about $300 a month, but until then, I feel like I’m throwing my money away.

Suggestions are desperately needed.
Denise E.

A common problem

That a good question! It’s also a common problem. Studies show that only about one third of all credit card users pay their bills completely each month. So Denise has lots of company! But with an organized approach and some determination you can get out of debt.

Stop digging a bigger hole

The first step? Do not add any new credit card debt. When you want to get out of a hole you quit digging!

If you continue to use your credit cards no plan will eliminate the debt. No credit counselor, debt consolidation loan or anything else will work. (See Reduce Your Debt with a Sinking Fund.)

The only thing that’s going to help is to take a good, hard look at yourself and decide if you’re willing to make some lifestyle changes to solve the problem.

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Make a list of all of your credit card debt

Next, let’s get a feel of where we stand today.

Make a list. You’ll need to include all your credit card debts. List the amount of the debt, the interest rate charged, how much interest is charged each month and what your minimum monthly payment is.

Total all the columns (except “interest rate”).

The credit card companies’ biggest secret

You’ve just uncovered the card companies’ biggest secret.

When you’re out shopping, the only question they want you to ask is ‘can I afford the minimum’ each month. But if you do that you’ll be wasting the maximum amount of your income on interest payments.

How to break the cycle

So how do we break the cycle? We must recognize that we’re fighting two battles.

The first is a battle for your mind. You want the freedom of being debt free. They want you to believe that it’s not possible and that no one else is debt free either.

The second battle is to maximize the amount of your monthly payments that goes to paying off the principal owed. Please notice that I didn’t say that you need to pay more each month. Of course, if you do pay more, your debts will come down faster.

But can we accomplish the same thing without writing bigger checks?

Start with the card with the highest rate

Take another look at your list. What’s the highest rate of interest on the list? That’s the debt that you’re going to attack first. It’s the one that’s inflating the “interest charged” total.

Where will you get the money? If you’ve been paying more than the minimum on any accounts, change your strategy to just pay the minimum. Then apply the extra to your high cost target account.

As you pay down your debt you’ll have additional money available to you. Add that extra to what you’ve already been paying on the highest interest debt. As you begin to reduce the interest charged, you’ll find that the process snowballs in your favor.

That is why this method is known as The Snowball and it is the only method that is going to make a dent in your debt when you can’t really pay much more than your minimums. First you eliminate the account with the highest rate. Then that money is applied to the next highest rate account. It gets easier as you go.

What if you can only cover the minimum payments?

Suppose you’re really in a bind and can only afford the minimum on each account. What then?

There’s still two things you can do reduce the highest cost debt.

The first is to call the credit card company and ask for a lower rate. Stress that you’ve paid on time. Or that you’ve been a long term customer. Even if you can’t think of any reason, try anyway. You have nothing to lose but the phone call. It’s surprising how often a rate will be lowered if you ask.

The second method is to transfer the debt to a lower cost card. Perhaps it’s to a card that you already carry. If so, make sure you know if you will be charged a fee for the balance transfer. Depending on the fee, you might not wish to make a transfer to an existing card, even if the balance transfer comes with a low rate. Do the math to make sure a transfer will actually help you pay down your debt faster.

Or you might need to compare balance transfer cards and apply for a new one. A new card will often allow fee-free balance transfers Look for one that has a low introductory rate. Some will even have a 0% introductory rate. Even if it’s only for six months or a year, you’ve lowered your interest charges and found some money to pay off principal.

Here’s the payoff

You’re going to keep paying the same amount towards all the accounts combined as you did before.

If you’ve been writing checks that total $400, make sure that all your payment still total $400. But, any money over the minimum amount due on each account will go to the highest interest account until it’s paid off.

Does the strategy work?

Try it for three months and then make a new list. Then compare the two lists. You should see that both the total amount of interest charged and the total amount of debt is coming down.

That’s important. Remember the mental battle we talked about earlier? You need encouragement to reach your goal. Compare your lists and see what you’ve accomplished.

It’s a good feeling when an account ‘bites the dust’. In fact, some advisers suggest that you take a smaller account and pay it off first. In any case, when you get discouraged, compare your current list to the one at the beginning. Then pat yourself on the back!

A final thought

Denise said that she felt like she was “throwing money away”. And she’s right. The money you spend on interest charges doesn’t buy you any more food, housing or goodies.

Ask yourself a question. Suppose you had the money you spend on interest payments each month because you were debt free. If you used that money for you and your family, how much better would your life be?

Reviewed December 2021

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.

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