How the credit card minimum payment becomes a 20-year loan

Category: Banking & credit
Contexts: Getting a credit card, Using a credit card
Reading time: 4 minutes · Published

What it is

A credit card lets you pay a small amount each month called the minimum payment. That small amount is mostly interest. The debt barely moves. You are being offered a very long loan disguised as a flexible payment.

Where you will see it

Credit cards. Store cards from large shopping chains. Buy now pay later accounts that let you top up with a minimum payment instead of clearing the balance.

What the regulators say

ASIC Report 580 found that more than 18 per cent of Australian cardholders are stuck in persistent debt. They pay more in interest and charges each year than they pay off the balance. The Australian Securities and Investments Commission considers minimum-payment-only behaviour a structural risk to consumer financial wellbeing.

How they trap you

They say
Pay just the minimum.
It is actually
A 20-year loan at 22 per cent.
What to do
Pay the full balance. Or pay the most you can. Never the minimum.

The story

Lucy buys a fridge for $5,000 on her card. Her minimum payment is $100. Of that, $90 is interest. Only $10 reduces the debt. By the time the card is paid off, 20 years have passed. Lucy paid $11,000 in interest. On top of the fridge.

Frequently asked questions

Is paying the minimum payment bad?
Yes. If you only pay the minimum, most of your payment goes to interest, not the debt. A $5,000 balance can take 20+ years to clear and cost $11,000 in interest.
What happens if I only pay the minimum on my credit card?
Your balance barely moves. The card issuer keeps charging interest on the remaining amount every month. Over time, you pay back several times the original purchase.
How is the minimum payment calculated?
Most Australian cards calculate it as 2 to 3 per cent of your current balance, with a floor of $10 to $30. The percentage looks small. The years of interest that follow are not.
Does paying the minimum hurt my credit score?
Not directly, if you pay on time. But it keeps your debt high, which raises your credit utilisation ratio. A high ratio reduces your score and your borrowing power.
What is the fastest way to pay off credit card debt?
Stop using the card. Pay the highest amount you can each month. If you have multiple cards, focus all extra payments on the one with the highest interest rate while paying the minimum on the others. This is called the avalanche method.

Related traps

Why buy now pay later is a loan, not a payment plan

ASIC found 55 per cent of buy now pay later users spend more than they otherwise would. Here is what BNPL really sells you and how to avoid the trap.

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About the author

Enrico Scha spent 25 years inside the design industry that creates the patterns documented on this site. After leaving in 2025, he writes about how the patterns work so consumers can spot them in 10 seconds, not after the money is gone.

Former 25-year insider in the design industry that creates these patterns

Sources