The really dumb financial mistake 99 percent of us make every month


You know better than to do this. And yet...

Whether you're good or bad at managing your finances, there's one mistake that's very, very easy to make and can cost you tens or even hundreds of thousands of dollars: Making the minimum payment on your credit card every month. If you pay a little more than the minimum, don't pat yourself on the back. That's a pretty bad move too.

Making a minimum payment (or minimum payment plus, say, $20) is such a bad move that as part of the Credit CARD Act of 2009, credit card companies were required to print on each invoice just how much interest the cardholder would pay over time by making minimum payments. They're also required to show how much you'd have to pay to pay off the card in three years, and the many thousands you'd save by doing so.

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But even though we've all been thoroughly warned about the consequences of paying off credit card debt too slowly, a surprising number of us still do just that. According to new research, fewer than 1 percent of credit card debtors have adjusted their payments to hit that three-year goal, even with the benefits of doing so spelled out in black and white. And 29 percent still pay the minimum or just slightly more every month.

You may think there's a simple explanation: Incomes have grown slowly in the recovery and people simply can't afford to pay more than the minimum payments. Not so much. The researchers observed what happened when credit card companies adjusted their minimum payments upward. Most of the time, consumers paid the higher amount, suggesting they could have paid that much all along. The National Bureau of Economic Research, which conducted the study, estimates that 9 to 20 percent of cardholders could pay substantially more than the minimum amount but choose not to, even though they see the future result of that choice in black and white every month.

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If you're among the millions of people who pay the minimum balance or just a little more on their credit cards, I'm not judging you. I've done that myself many, many times. Despite the Credit CARD Act rules, credit card issuers are masterful at subtly suggesting that making the minimum payment is the right thing to do, which it is from their point of view.

But here are some strategies that can help you get out from under credit card debt a little more quickly:

1. Adjust your automatic payments.

Many credit card companies give you the option to have the minimum payment automatically deducted from your bank account on the due date every month. Great idea--it spares you those obnoxious $25 late fees you may have to pay if you miss the credit card company's deadline by even a few minutes. The problem with this is that you have to make a second, separate payment if you want to pay more than the minimum and for most of us, inertia prevents that from happening.

So use your own laziness to your advantage. Instead of setting up an automatic minimum payment with the credit card company, set up an automatic payment to the credit card from your bank. Tell it to send out the same amount every month and make that amount substantially higher than the minimum balance. That way, you'll have to take action if you want to reduce your payment to the minimum amount, and of course you can always do that if money is tight in a given month.

2. Pay more than once a month.

You might know that making a big monthly payment is a smart move, but can't pull that money together all at once. Luckily, you don't have to. You can pay your credit card company as often as you like, so use that fact to your advantage and set up manageable payments on a more frequent basis such as once a week or once every two weeks.

If you're one of these people who pays for everything with your credit card to earn rewards and then pays off the (large) bill every month, this approach will have the added benefit of improving your credit score (because you'll be using less of your available credit).

3. Make sure to pay off automatic charges to your credit card.

Utilities love setting up automatic payments from your credit card and many online services, such as Netflix, require you to do that. One simple solution is to switch these automatic charges to a debit card so that you're making payments as they come in instead of using credit. If you don't do that, be very careful to at least cover those automatic charges when you pay your bill every month. (If you follow Step 1, you can make sure to create an automatic payment that pays them off.) Otherwise, making the minimum payment will put you deeper and deeper in the hole since it likely won't cover the new charges. Your total balance will keep going up. And your goal of clearing your credit card debt will get farther away instead of closer.

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