A statement shows two numbers that look friendly: a balance and a small . What it does not show clearly is how many years the minimum path takes and what it costs in total.
Before we start: what do you think?
You owe €2,000 on a credit card at 24% APR, stop using it and pay €60 a month. Roughly how long until the debt is gone?
✗ Too fast: €60 × 24 is only €1,440, less than the balance.
✗ That is €2,000 ÷ €60, which ignores the interest added every month.
✓ Right: about €40 of the first €60 goes to interest, so it takes 56 payments.
✗ €60 is more than the €40 monthly interest, so the balance falls, slowly.
APR and the monthly rate
The amount you borrowed is called the . Interest is the price of using it. Most loans and cards show a yearly rate, often called the . But interest is usually charged every month. A simple way to see the monthly rate is to divide the yearly rate by 12:
| Yearly rate | Monthly rate (÷ 12) | Interest in month 1 on €2,000 |
|---|---|---|
| 12% | 1% | €20 |
| 18% | 1.5% | €30 |
| 24% | 2% | €40 |
The exact method differs between lenders and countries, and some include fees in the yearly figure. So check your contract for the monthly rate and the total you will pay back over the (the length of the loan).
If you pay nothing, each month's interest is added to the balance and then earns interest itself. At 2% a month, a balance grows by about 26.8% in a year, not 24%, because 1.02 to the power of 12 is about 1.268. This is working against you.
Quick check
A card charges 18% a year. What is the monthly rate, and the first month's interest on €2,000?
Why a small payment takes so long
Each payment first covers that month's interest. Only what is left reduces the principal. On €2,000 at 24%, the first month's interest is €40. If you pay €60, only €20 reduces the debt. If you pay exactly €40, the balance never falls at all.
Worked example: €2,000 at 24% APR, no new spending
Interest is 2% a month on the remaining balance. The payment stays the same until the debt is cleared.
| Monthly payment | Time to pay off | Total interest | Total paid |
|---|---|---|---|
| €40 | never | never ends | never ends |
| €60 | 56 months | €1,328.83 | €3,328.83 |
| €100 | 26 months | €579.75 | €2,579.75 |
| €200 | 12 months | €254.07 | €2,254.07 |
Going from €60 to €100 a month saves €749.08 of interest and finishes 30 months earlier.
Quick check
On a €2,000 balance at 24% APR, what happens if you pay exactly €40 a month?
The minimum payment trap
Many cards set the minimum payment as a small share of the balance, for example 3% or €15, whichever is higher. Rules vary, so check yours. The catch: as the balance falls, the minimum falls too, so the debt shrinks more and more slowly.
On the same €2,000 at 24%, with a minimum of 3% (after interest) or €15:
- The first minimum is €61.20. Pay exactly €61.20 every month and the card is clear in 54 months, with €1,276.53 of interest.
- If you pay only the minimum each month, it takes 186 months, which is 15 years and 6 months, and the interest is €3,161.55. That is more than the amount you borrowed.
The defence: turn your first minimum into a fixed amount and never let it drop. Better still, pay more.
Quick check
Why does paying only the minimum take so much longer than paying a fixed amount?
Which debt to pay first
With several debts, pay the minimum on all of them and put every extra euro on one debt at a time. There are two common ways to choose it.
- Avalanche method: extra money goes to the debt with the highest interest rate first. This costs the least interest.
- Snowball method: extra money goes to the smallest balance first. Early wins keep many people motivated.
Worked example: Three debts, €200 a month in total
A credit card: €1,800 at 24%, minimum €50. A laptop bought on a shop credit plan: €700 at 15%, €25 a month. A small bank loan: €400 at 10%, €20 a month. The minimums add up to €95, so €105 a month is extra.
| Avalanche (highest rate first) | Snowball (smallest balance first) | |
|---|---|---|
| First debt cleared | month 14 (the card) | month 4 (the small loan) |
| All debts cleared | month 17 | month 18 |
| Total interest | €415.73 | €505.60 |
Avalanche saves €89.87 and one month. Snowball gives a first win ten months earlier.
Both beat paying only the minimums. Need quick wins? Choose the . Steady with plans? The costs less.
A loan from family often has no interest. Keep paying it as agreed, but extra money usually goes first to debts that charge interest.
Finally, put the card away while you pay it down, and build a small cushion so the next surprise does not land back on it. (See Your emergency fund.)
Key takeaways
- Each payment covers the month's interest first. Only the rest reduces the principal.
- A yearly rate of 24% is about 2% a month. Unpaid, a balance grows by about 26.8% in a year.
- Small increases in your payment cut the total interest sharply.
- Minimum payments shrink with the balance. Turn the first minimum into a fixed amount, or pay more.
- Avalanche (highest rate first) costs the least. Snowball (smallest balance first) gives early wins.
Try this
List every debt with its balance, yearly rate and monthly payment. Divide each rate by 12 and multiply by the balance to see this month's interest. Then choose avalanche or snowball, circle the debt that gets your extra money, and write down how much extra you can pay.