Thursday, November 14, 2013

Smart Money: The Trick to Minimum Payments

OK, I'm going to share something with you.  Yes, I consider myself financial blogger (at least some of the time) and yes I have worked in the financial industry for more than 20 years.  But guess what; I'm not perfect.  Shocking, I know.  

Yes, I would love to one of those people who have paid off all their debts, including their mortgage and live a total cash lifestyle.  I'm working on it, believe me.  But for the time being, I have credit card debt.  Not a horrifying amount of it, but more than I'd like.  

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But because I'm me, I always have to do things in my own way - I call that my "rebel without a clue" streak.  I do the debt snowball thing, but I do it with a twist (more on that later).  I do the minimum payment thing, but again, I do it with a twist.  I always have to put my own stamp on things - don't ask me, I don't know.  

Here is my trick that I want to share with you.  First of all, you have to realize that minimum payments are a sucker's game.  In fact, they are so bad that the government, who has never been all that concerned about our welfare, has troubled themselves enough to put a warning on every single credit card bill, about the dangers of the minimum payment.  That should be a red-letter warning sign to every person in America with a credit card.

Minimum payments are specifically designed to KEEP you in debt.  The credit card companies set the minimum payments very carefully to a level that is designed to ensure that if you ever do manage to pay off your credit card, you'll be old and grey (and broke!).  

But, on the other hand, what are you supposed to do? Obviously you can't pay off that whole $3,000 balance right now, so you figure if they are going to LET you pay the minimum payment, that's what you're going to do.  Why pay more than you have to?  

Here's why you should pay more than you have to.  If you are serious about getting out of debt, you need to start taking elephant-sized bites out of your debts.  Otherwise you're just going to either stay in debt or go further into debt, and we all know that is a losing strategy. 

So, here's my trick.  Like most people, I get paid twice a month.  So I pay the minimum payment on my credit cards TWICE a month.  So, if the minimum payment is $40, I pay $40 on my first payday, and then I pay another $40 on my second payday.  Some months, I even have a third payday, so I'll pay that $40 again, just like clockwork.  And pretty soon, that minimum payment is only $30, then $20, and down it goes until it finally vanishes.  

The reason I do this is simple.  First of all, it accelerates my debt repayment by 50%.  That's significant progress. Second of all, it eliminates the possibility of getting a late fee.  Late fees suck and they can be hazardous to your financial health as well.  Some companies will automatically jack up your rate sky high after as little as one late payment.  If you are paying at least the minimum twice every month, you'll never have a late fee!  

Now, I hear you saying, what about my snowball?  First of all, if you don't know what a snowball is, it's a Dave Ramsay concept (at least he's the financial expert I learned it from).  The idea is that you pay off the smallest bill first and then you apply that money plus what you were already paying to the second smallest bill, and so on.  Your payments stay the same even as the debt starts to rapidly disappear.  Towards the end, you are making enormous progress, and it gives you a psychological boost to see the bills being paid off one after the other.  

I believe in the snowball strategy too, but I do a more modest snowball amount to allow for my double-minimum strategy on my remaining non-snowball accounts.  Also, as I said, I have a bit of a twist.  As an incentive for me to put as much effort as possible on my snowball, I have a little celebration at the end of each payoff period.  As I pay off each bill, either through my double-minimum method, or through my snowball method, I allow a one payday break before I start on the next bill.  

For instance, my Dress Barn account has been one of my double minimums, so I have been paying $35 per pay period on it.  It will be completely paid off next month, so I will have an extra $35 in spending money before I add that extra $35 per payday into my snowball account to knock down the next bill.  

And don't forget my famous credit card time-out tip.  I have two credit cards right now sitting in time out and one of them is my Dress Barn card.  I can't help it, those clothes are so darn cute!  But not cute enough that I am willing to pay their 24.99% interest!  So my card is languishing in a drawer until I learn to behave myself!  

Note:  If you are in a position where your minimum payments are absolutely ALL you can manage, then it's time for a last-ditch effort to get yourself back on a solid footing again.  First of all, definitely do the credit card time out tip.  Unless you need your credit cards to provide basic food and shelter-type needs, in the drawer they go.  Then look for ways you can cut back on your spending, or increase your income (part-time job, Ebay seller, pet setting, babysitting, anything will do) to be able to pay even a little bit extra on those minimums until you can get them down to something you can handle.  Don't let those nasty credit card people have control over your finances.


Turning 30 Coach

Paying the minimum twice per month on a credit card bill is an awesome idea! Another way to cut back on spending is to look at your cell phone service. If you shop around, it's now possible to get data and messaging plans at a fraction of the cost with no contract!

Tracie Nall

I love the idea of paying the minimum payment out of of each paycheck.

Amber Hardy

That's a great approach! Never thought of that method before. I agree, you need that psychological boost that you're getting somewhere too!

Happy SITS Sharefest!

Talitha Haynes

I never thought of paying my credit card every pay period. I going to start doing that. One thing I did do was automatic payment so my bill is not late. Coming to from SITS Girls.

Rabia Lieber

Paying the bill twice a month is genius! We are currently snowballing two credit cards and two personal loans. Our plans calls for complete payoff in 5 years. It seems like a long time, but it also feels really doable. After Christmas bills have been paid and my new raise comes through, I'm going to look at how paying twice a month would work for us. It would certainly be easier on the paycheck!

Happy ShareFest!


This is great. Thanks for that idea! Stopping by from SITS.

Khloé Belle Gadson

Stopping by from #SitsSharefest.
I love this article.
I am so far into debt that I don't know how to get out of it and I need to so I can open this store that I've been desperate for.

Keeping your blog bookmarked.

Keep it Touched,

Six Figures Under

Great article! It's true that minimum payments will only get you deeper in debt. You will never get out of debt by paying the minimum payment.

We have over $100,000 in student loan debt. We are aiming to pay in off in 3 years (on a $40K income). By doing that versus paying it off (plus interest) over 10+ years, for example, we are saving over $50,000 in interest. That's huge.

The way to get ahead is to pay it off fast! Thanks for sharing on SITS girls!
Stephanie @

Robbie K

Great advice! When I'm not in a position to pay the minimum twice a month I try to add a few bucks to each monthly payment. If the payment in $161 I try to pay $165 or $170. It starts to make a dent too.

Sheila Skillingstead

I teach Financial Algebra to high school students. I will be presenting the snowball soon. I will also put in your ideas because many of these students will be paid every two weeks. Great ideas. I use my credit card and pay it off in full. I used the snowball method to be credit card and mortgage free before my husband retired. I retire in June of 2014 and the only debt we will carry is his student loan for his second career and our car loans. Why keep car loans? To keep our credit score healthy. Husband wants me to think of it as a rent payment. Thanks for the blog. Easy to read and interesting.

Embracing The Good Life

This is all great advice! I agree with you about putting your own twist on things. I like Dave Ramsey but he's just so extreme. Whatever works, right?

Stephanie Ziajka

Great post! I don't think a lot of people realize they're simply paying off interest... it really is a loser's game. Thanks for this post! Stopping by from SITS :) Have a great rest of your weekend!

Diary of a Debutante

Barbara Joy

Amen! My husband and I just got completely out of debt this year and it feels spectacular!

Melissa Bondar

Way to realize you were never going to get anywhere making the minimum payments. I totally agree that you need to take elephant sized chunks out of your debt to avoid all the extra charges from the interest.

It's so demoralizing to just keep paying every month and feel like the total is never going down because it actually isn't because of interest.

(And I love Dress Barn too - good idea putting the card in your time out spot.)

Stefanie O'Connell

I like some of your alternative strategies. Going beyond the minimum payment but not so much so that it's completely overwhelming is an excellent idea.

Brielle and Me: Our Journey

You are totally NOT a "rebel without a clue".... You are brilliant! Anyone who makes a serious effort to debt reduction AND helps others is awesome in my book! Thanks for your posts and helping others!

Corlie Mortimer

Great idea! I have been struggling to pay off my credit card for over a year now, will try the twice a month payment idea :)

Michelle F.

I like the idea of paying twice a month! Great tip.

Lee Aldrich

That darned Dave is SO smart! And he's right. We have one card that we put EVERYTHING on each month - cause it gives us flight miles - and pay it off each month. The only debt is the mortgage, and I'm determined to drive our cars until the wheels fall off 'cause I HATE buying things that depreciate! Good job on YOUR plan!

Thanks for sharing!

Lee Aldrich
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