Wednesday, June 12, 2019

Credit Card Hopelessness

We’ve all seen the block of text on our credit cards that says how long it will take to pay off the debt if we just make minimum payments. I suspect this disclosure doesn’t make a positive difference.

Here’s the text that appears on my latest credit card statement:

“At your current rates of interest, if you only make your Minimum Payment by its due date each month, it will take approximately 35 year(s) and 10 month(s) to repay the account balance shown on this statement.”

35 years is a depressingly long time for it to take to get out of debt. And this is for a balance of only a little over $4200. It gets longer for larger balances. I calculate that my minimum payment should be a little over $70, but it’s only $10, which doesn’t even cover interest. Perhaps as long as I keep paying my bill in full every month, my minimum payment stays at $10 so I won’t realize that the interest is actually about $70 per month.

Superficially, the mandated disclosure with the depressing message of it taking decades to get out of debt seems like it should motivate people to pay more than the minimum payment. However, I suspect it often has the opposite effect. What’s the point in trying if you can’t get out of debt for decades? You might as well give up. I don’t believe these things, but I can understand if people become hopeless about their debts.

I have a suggestion for a different disclosure:

“The amount you have to pay monthly to clear this debt in
1 year is $391,
3 years is $157,
5 years is $112.”

This disclosure is more hopeful and more useful for credit card holders. I suspect this type of message is more likely to induce people to pay more than the minimum payment. We can only know for sure by how strongly banks and credit card companies oppose it.


  1. I think the minimum payment on some credit cards is $10 plus interest. So if you paid only the $10 minimum, your next payment would $80 ($10 + $70 interest).

    1. @Farly: I agree that some such explanation is correct, but I'm more concerned with why credit card companies have a rule like this. Intuitively, it makes sense that the minimum payment should be at least one month of interest. But setting the minimum payment much lower than this might make me more relaxed about not paying my account in full one month. This looks like an effort to entice me into high-interest debt.

  2. In Quebec the minimum payment is being changed to 5%, which I think makes a lot more sense.

  3. @Farly: It's moving up each year and supposed to get to 5% eventually. I like this idea. We'll see if it spreads elsewhere.