Minimum Payment Less Than Interest? Here's What to Do (+ Calculator)

The Most Dangerous Debt Trap

There's a sinking feeling that comes from checking your credit card or loan statement, seeing that your balance has increased, and knowing you made the required payment. How is this possible? You've fallen into a dangerous financial trap known as negative amortization.

This occurs when your minimum required payment is not enough to cover the interest that accrued on your debt during the month. The unpaid interest is then added back to your principal balance. The next month, you're charged interest on this new, larger balance. It's a vicious cycle that can make it feel impossible to get ahead.

How to Check if You're in This Situation

You don't have to wait for your statement to find out if you're in trouble. You can calculate your monthly interest charge with a simple formula.

Now, look at your minimum payment. If your minimum payment is $150, but your interest charge is $200, your balance will grow by $50 that month, even though you paid. If your minimum payment is less than your calculated monthly interest, you are in a state of negative amortization.

Your 5-Step Action Plan to Break the Cycle

Seeing your debt grow is scary, but you are not powerless. Taking immediate, decisive action is critical. Follow these steps to turn the tide.

Step 1: Pay More Than the Minimum, Immediately

This is the most critical first step. You must pay more than the monthly interest charge. Even if it's only $1 more, you need to ensure your payment is covering the interest and starting to chip away at the principal. Look at your budget and find any amount of extra cash you can send.

Step 2: Call Your Creditor

Don't be afraid to get on the phone. Many people are surprised by what a simple conversation can achieve. When you call, you can:

• Request a lower interest rate: Explain your situation and that you're committed to paying off the debt. If you've been a long-time customer with a good payment history, they may be willing to lower your APR, sometimes temporarily as part of a hardship program.
• Ask about payment plans: Some lenders offer plans that can fix your payments or lower your interest rate for a set period to help you get back on track.

Step 3: Stop Using the Account

You cannot dig your way out of a hole if you're still digging. For credit cards, this means putting the card away and stopping all new purchases immediately. For loans, it means committing to not taking on any new debt while you tackle this problem.

Step 4: Find Extra Money to Pay Down Debt

To truly make progress, you need to increase the amount you're paying each month. This means either cutting expenses or increasing your income. We have a full guide on 7 proven strategies to find extra money for debt payments, but some quick ideas include:

• Performing a detailed budget audit to find spending leaks.
• Negotiating recurring bills like cable, internet, and insurance.
• Picking up a temporary side hustle or selling unused items online.

Step 5: Consider Consolidation or a Balance Transfer

If your interest rate is the core problem, moving the debt to a lower-interest product can be a game-changer. Your two main options are:

• Balance Transfer Card: If you have good credit, you may qualify for a credit card offering 0% APR for an introductory period (often 12-21 months). This can provide a crucial window to pay down your principal balance without any interest working against you.
• Debt Consolidation Loan: A fixed-rate personal loan can be used to pay off your high-interest debt, leaving you with a single, predictable monthly payment at a much lower interest rate. This is often a better option for larger debt amounts.

We break down the pros and cons of each in our detailed guide on Balance Transfers vs. Consolidation Loans.