Debt payoff time

What it's for

Handy to see how much a debt or card balance really «costs» you: the lower the payment, the more months and interest. Raising the payment shortens it a lot.

Warning

If the payment is at or below the monthly interest, the balance never falls. Revolving credit cards have very high rates: pay them off as soon as you can.

Why a minimum payment never ends

The minimum payment on a revolving card is worked out as a percentage of the balance, not as a fixed sum: when the debt falls, the minimum falls too, and the finish line moves away by itself. Paying only the minimum, a balance of two thousand can take more than ten years and return almost twice what was spent.

It is the mechanism that makes that product profitable for the issuer, and it is not hidden: in many countries the statement must state how long repayment takes at the minimum. It is a number almost nobody reads, and that almost always comes as a shock.

The threshold below which there is no way out

If the payment equals or falls below the month's interest, the capital does not drop by a cent: you are paying to stand still. A debt of 3,000 at 18% a year generates about 45 of interest a month; a payment of 45 leaves it there forever, a payment of 50 clears it in almost twenty years, a payment of 100 in a little over three.

This is where the graph stops being linear: every extra unit on the payment is worth far more than the one before, because it goes entirely onto the capital. It is also why paying fifty more a month can shorten a debt by years, not months.

In what order to clear several debts

With several debts open there are two well-known strategies and both work, for different reasons. The avalanche method pays off the highest-rate debt first, and mathematically costs least. The snowball method pays off the smallest debt first: it costs a little more but closes a position quickly, and the feeling of progress is what keeps the plan alive.

In both cases the operating rule is the same: the minimum on everything, and everything left over onto one. Spreading the surplus across all the debts is the route that lengthens every one of them.

Before consolidating, look at the total

An offer to merge several debts into one lower payment is nearly always a longer term. The payment falls, and with it the monthly pressure, but total interest can grow considerably. The number to ask for is not the payment: it is how much is repaid in total, including arrangement fees and any bundled insurance.

Consolidation makes sense when the new rate really is lower than the old one and the term does not stretch. If the term doubles, what has been bought is time, not saving.

Nearby tools

For an instalment plan with capital and interest separated there is Amortisation schedule; for the real cost of a loan Nominal rate and APR. To put monthly outgoings back in order 50/30/20 budget, and for the opposite goal Savings goal.