When your repayments don’t cover the interest

Resources · Paying off debt · 4 min read Advanced

Key points

• When your repayments don’t cover the interest, the balance grows even though you’re paying.
• You can check by comparing the interest charge on your statement with what you pay.
• This is a sign to get support. It isn’t a sign that you’ve failed.
• Free debt help is free and confidential, and can look at your whole situation with you.

What happens when repayments don’t cover the interest

Every month, interest is added to what you owe. Then your payment comes off. If the payment is bigger than the interest, the balance goes down. If it’s smaller, the leftover interest joins the balance, and next month’s interest is charged on that higher amount.

It creeps up on people in a few ways. Maybe the payment was set back when the rate was lower, and the rate has since gone up. Maybe fees and charges have been piling on. You might have had to pay less than usual for a while. Or a payment plan or arrangement covers less than the interest.

A worked example

Say you owe $8,000 on a card at 24.9% a year and pay $150 a month. The same maths works in any currency.

Assumptions: interest is charged monthly at 24.9% divided by 12, on the balance before that month’s payment. The payment stays at $150. Nothing new goes on the card, and no fees are added.

Month 1. Interest is $166.00. After the $150 payment, you owe $8,016.00.

Month 6. Interest is $167.73. You owe $8,101.12.

Month 12. Interest is $170.06. You owe $8,215.51.

A whole year of payments, $1,800 in total, and the balance is $215.51 higher than where it started. At this payment it never gets paid off. Never.

How to check your own debts

You don’t have to do the maths yourself. Your statements usually show it.

For each debt:

1. Find the interest charged for the month on your statement.
2. Add any fees charged that month.
3. Compare that total with what you paid.

If you paid less, or only a little more, the balance isn’t really moving. Look at the balance across your last few statements too. Flat or rising while you’re paying is the same warning sign.

Why this is the moment to get help

Once repayments stop covering the interest, budgeting tips and payoff orders can only do so much. Scraping together a little extra each month can’t always close the gap. Shuffling debt around can bring new fees and new risks.

This is exactly what free debt help services are for. In many places there are free, confidential services that help people look at all their debts and their budget together, and talk through the options that apply where they live.

A few things you should know. Reputable free services don’t charge you. And they’re for ordinary people: plenty of the people who use them are working and paying bills, and have just reached a point where the numbers don’t add up.

The options available, and the rules around them, differ from place to place. A free service can tell you what applies to you. Going earlier usually helps, because getting help before payments are missed can leave more choices open.

Our free debt help page shows you where to start.

Be careful with paid offers

Under pressure, an offer that promises to make debt vanish fast can look very tempting. Be wary of anyone who wants big upfront fees, pushes you to sign quickly, or promises a particular outcome. Taking on a new loan to cover payments can also dig the hole deeper if the gap underneath stays the same.

Free help is a safer first step.

While you’re getting help

In the meantime, keep essentials first. Housing, utilities, food and getting to work come before everything else. Try not to add new debt, so the gap doesn’t get any wider.

Pull your paperwork together as well. Recent statements for each debt, plus a rough list of your income and regular costs, make any conversation about your situation much easier.

And go easy on yourself. Debt that grows faster than you can pay is a common problem with a lot of causes. It isn’t a judgement on you.

Common questions

Why is my balance going up when I’m making payments?

If your payment is smaller than the month’s interest and fees, the leftover gets added to the balance. Next month’s interest is then charged on that higher amount.

How do I know if my payments cover the interest?

Compare the interest and fees on your statement with what you paid. If the balance stays flat or keeps rising over a few statements while you’re paying, that tells you the same thing.

Where can I get help if my repayments don’t cover the interest?

Free, confidential debt help services can look at all your debts and your budget together. Our free debt help page shows you where to start.

Try it

You can find your Freedom Date to see whether your current payments ever reach a finish line. If they don’t, free debt help is the place to start.

General information only, not financial advice. Your situation is your own.