"Does Paying More Than the Minimum on a Credit Card Go Toward the Principal?"
This is one of the most common questions we hear from individuals looking for effective ways to tackle credit card debt. Here’s what you need to know to make the most of your payments and start making real progress.
How Interest Accrues on Credit Cards
To understand how payments work, it’s important to first know how credit card interest is calculated. Most credit card issuers advertise the APR (annual percentage rate), which gives you a general idea of the interest rate over the course of a year. For example, if you have a $100 balance on a card with an APR of 10%, you’d expect about $10 in interest to accrue over the year.
However, what many people don’t realize is that most credit cards accrue interest on a daily basis. This means that interest is calculated daily, not monthly, based on your card's daily periodic rate (the APR divided by 365). For instance, if your APR is 10%, the daily interest rate is roughly 0.027% per day. This daily compounding makes it difficult to avoid interest unless you pay off the entire balance by the due date.
So, when you pay more than the minimum, the additional amount generally goes toward your principal balance, after covering any accrued interest or fees. This is crucial for reducing the overall debt and minimizing the total interest you’ll pay over time.
Tips for Paying Down Credit Card Debt
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Stop Using the Card: This is step one. Think of it this way: you can’t dry yourself with a wet towel, and you can’t pay off a credit card if you’re still adding to the balance with new purchases. Set the card aside and commit to using cash or a debit card while you tackle the debt.
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Pay More Than the Minimum: Minimum payments are designed to keep you in debt. If you review your credit card statement, you’ll see the minimum payment is barely enough to cover the accrued interest for the billing cycle. To make real progress, you need to pay much more than the minimum—ideally as much as your budget allows. Your payment should at least exceed the interest charges to avoid the balance growing further.
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Target High-Interest Debt First: If you have multiple credit cards, consider using the debt avalanche method by focusing on paying off the card with the highest interest rate first while making minimum payments on the others. Alternatively, you can use the debt snowball method to pay off the smallest balance first for quick wins and motivation.
Take Control of Your Financial Future
If credit card debt feels overwhelming, you’re not alone—and there’s a way out. At You Inc. Wealth Education Services, we’re here to answer your questions and help you find a clear path to financial freedom. Whether you need help understanding your credit card statement or creating a customized debt repayment plan, we’re here to empower you with the tools and strategies you need.
Ready to take the first step? Let’s work together to tackle that credit card debt once and for all!
