Do you know how many Americans carry debt? I had to look it up but was unsurprised to learn it was 3 in 4 Americans.
What this article covers
Opher Ganel explains how loans work when you pay on schedule, then walks through seven ways a loan balance can grow instead of shrink, from carrying a credit card balance and missing or late payments to deferment and negative amortization. Worked examples show a $1,000 credit card balance climbing to $1,169.55 after three missed payments and a $30,000 student loan topping $40,000 when payments are deferred through four years of school.
Key Takeaways
Missing credit card payments adds interest, late fees and a penalty APR to your balance
In Opher Ganel’s example, a $1,000 balance at 24% APR grows from $999.43 to $1,169.55 after three missed payments, as a $30 late fee, then a $41 fee, stack on top of unpaid interest and the APR jumps to a 29.99% penalty rate. That penalty rate typically sticks until you make six on-time payments in a row.
Carrying a credit card balance turns a free short-term loan into expensive debt
Paid in full each month, a credit card works as a no-cost loan that also offers rewards, purchase protection and credit score benefits. Carry a balance and interest kicks in: at an 18.25% APR, a $10,000 balance costs $5 a day, or about $150 a month, and some new cards charge close to 30%.
Deferred payments and negative amortization grow your balance even without new borrowing
A $30,000 student loan at 7.5% deferred through four years of school grows to over $40,000, pushing the 10-year payment to $475.57 versus $356.11 if you pay the interest while in school. When a lender accepts payments smaller than the interest due, the unpaid interest is added to the balance, which then grows faster each month.
Tim DyerIf you’re reading this, chances are you’re in that 75% majority who have at least some debt.
I know I am, though I make sure to avoid high-interest debt like carrying credit card balances.
How Does Your Debt Compare to the Average American’s?
Experian published a study of debt in America in 2022. This study showed the following average debt of Americans as of the third quarter of 2021:
- Mortgages: $220,380
- HELOCs: $39,556
- Student loans: $39,487
- Auto loans/leases: $20,987
- Personal loans: $17,064
- Credit cards: $5221
Not everyone carries all the above types of debt, so the average total balance is “only” $96,371.
While you might think that people who carry more debt are less financially savvy, or at least poorer, that’s just not the case. Experian’s data show a positive correlation between credit score and average debt level, meaning that the higher your score is, the higher your likely debt level.
- Poor credit (300-579) – $33,375
- Fair credit (580-669) – $62,179
- Good credit (670-739) – $91,531
- Very good credit (740-799) – $105,492
- Excellent credit (800-850) – $139,280
However, those with higher credit scores typically pay lower interest rates on their debt and use their debt more strategically than those with poorer credit.
How Loan Interest and Amortization Work When You Pay on Schedule
Lenders make money by charging interest.
Here’s a simplistic example. A lender gives you $100 for a year, expecting you to pay back that $100 within the following year plus, e.g., $10.
That $10 is the interest on the loan, in this case, 10% annual interest.
A more common example is when a lender gives you a large sum of money to help you pay for a house (mortgage), a car (auto loan), or your college expenses (a student loan). In these situations, the loan has a term (the time over which you pay off the loan), and an interest rate (fixed or variable).
For simplicity, let’s look at a 30-year fixed-interest mortgage as an example.
You borrow $160,000 to help buy a $200,000 home (having put in $40,000 of your own money as the down payment). At 6% interest, you’ll need to pay $959.28 each month for 360 months (the last payment here will be very slightly higher to pay the loan off in full).
If you stick to this 30-year “amortization schedule,” after 30 years, you’ll have paid off the mortgage. To achieve that, you’ll have paid a total of $345,341.10, of which $185,341.10 will have been interest. Some people see this situation, where you end up paying over double the amount the lender gave you, and say this is a bad deal for you.
However, if you account for inflation reducing the value of the money you pay back, as well as possible tax benefits, your real cost of borrowing isn’t nearly so bad (you could even end up with borrowing costs less than zero if inflation runs higher than your interest rate over the life of the loan).
7 Ways Your Loan Balance Can Increase Instead of Shrink
There are seven ways your loan balance, or debt, can increase.
- Borrow more
- Stop paying your credit cards’ full balances each month
- Miss payments
- Make late payments
- Pay less than the minimum due
- Deferred payments
- Negative amortization
In the following, we’ll dig a bit deeper into all these.
1. Borrowing More: The Most Obvious Way to Owe More
The most obvious way to owe more is to borrow more.
For example, if you owe $1000 on a credit card and charge another $200, your balance increases by at least that $200.
2. Carrying a Credit Card Balance Instead of Paying in Full
Used correctly, credit cards are incredibly powerful tools. They provide:
- Convenience – you don’t have to carry lots of cash around; can reserve hotel rooms, rental cars, etc.; and can order products and services online
- Purchase protection – if you pay for something with a credit card and there’s a problem with the purchase, you can dispute the charge and get your money back
- Rewards – many credit cards give you points or actual cash rewards, anywhere from 1% to 10% or more (usually the higher levels are restricted to a short time, have a maximum reward total, and/or are limited to certain purchase categories)
- Help boost your credit score over time – making timely payments (typically 35% of FICO score), keeping outstanding balances low relative to your credit limit (typically 30% of score), length of credit history (~15%), credit mix (~10%), and not opening too many new credit lines (~10%)
- Free credit scores – many cards offer weekly credit score updates at no cost
- Record keeping – you get a monthly statement showing what you spend money on, and in many cases an annual summary too
- No-cost loan – if you pay in full, you’re getting a free short-term loan each month
However…
If you pay less than your full balance, credit cards start charging interest on your balance, and those interest rates are anything but reasonable.
Some new cards now come with annual interest rates near 30%!
If your card charges “just” an 18.25% Annual Percentage Rate (APR), that translates to a 0.05% daily interest rate. If your balance is $10,000, the card will charge you $5 a day in interest.
That’s $150 a month (for a 30-day month).
3. What Happens to Your Loan Balance When You Miss Payments
If you miss enough payments on secured loans such as mortgages or auto loans, the lender can (and usually will) seize the house (foreclosure) or car (repossession).
They will then sell the house or car (often at below-market rates to sell them quickly), use the proceeds to pay off your loan balance, and give you whatever’s left over (if anything).
If this happens, you suffer multiple consequences:
- You lose your house or car
- Since the house or car is (likely) sold at a below-market price, you end up with less left over than had you sold it yourself
- The lender reports your default to the credit reporting bureaus, so your credit score plummets
- You’re less likely to be able to borrow again anytime soon, or if you can, lenders will charge you extremely high-interest rates to compensate them for the higher risk that you’ll default again
If you miss fewer payments, or if you miss payments on unsecured debt, such as credit cards, your loan balance increases.
Here’s how that might play out…
Say you charge $1000 on your credit card this month, and the terms include 24% APR and a minimum payment equal to 1% of your principal, plus any new interest charges, plus any penalties. For simplicity, we’ll ignore the fact that most card issuers’ minimum payments have a floor equal to the lower of your full balance and say $25.
For simplicity, we’ll assume you don’t charge any more on this card.
When it comes time to make a payment, your statement shows $1000 owed but only requires a $10 payment (1% of $1000). There’s no interest charged yet because credit cards don’t charge interest unless you start carrying a balance from month to month, and there are no penalties.
Yet.
You send in a $10 payment.
The following month, the issuer sends you a statement showing $990 principal owed, plus $20.18 accrued interest (24% APR is 0.066% daily interest, so the daily interest charge for $990 is $0.65, and say the month is 31 days long, so your interest charge is $0.65 × 31 = $20.18).
Your minimum payment (1% of principal plus your new interest) is $30.08, which you pay on time. As a result, your total owed the following month drops to $999.43.
This is how things work when you pay at least the minimum payment on time – your balance decreases, albeit very slowly, with high-interest costs.
However, if you stop making payments, things get worse.
Fast.
As the first table below shows, missing your April payment increases your loan balance because (a) your previous interest gets added to your balance, and (b) your credit card issuer charges you a first late-payment penalty of $30.
Your total owed increases by just over $50, from $999.43 to $1049.81.
Missing the next payment in May makes things similarly worse, with your interest and penalty bumping up your total owed by another $50 and change to $1100.51.
Missing a third payment kicks things up a couple of notches.
First, your late-payment penalty jumps up to $41, and second, your APR jumps up to a penalty APR of (e.g.) 29.99%, which is a daily rate of 0.082%.
Your total owed jumps up as a result by over $69 to $1169.55.
As these three months progressed, your minimum payment increased from about $29 to over $60, to over $61, to over $80.
If you now start paying at least the minimum payment, the lender stops assessing late-payment penalties, but your interest rate will be stuck at the penalty APR until you make timely payments (typically) six times in a row.
That’s why your interest charges are around $28 rather than around $20.
Still, as the green-shaded total owed for August shows, your total balance starts creeping back down.
| Month | Days Until Paid | Principal | 1% of Principal | Interest | Penalty Fee | Total Owed | Min Pay | Change/Pay |
|---|---|---|---|---|---|---|---|---|
| Jan | 31 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $1,000.00 |
| Feb | 28 | $1,000.00 | $10.00 | $0.00 | $0.00 | $1,000.00 | $10.00 | ($10.00) |
| Mar | 31 | $990.00 | $9.90 | $20.18 | $0.00 | $1,010.18 | $30.08 | ($30.08) |
| Apr | 30 | $980.10 | $9.80 | $19.33 | $0.00 | $999.43 | $29.13 | $0.00 |
| May | 31 | $969.48 | $9.69 | $20.37 | $0.00 | $1,049.81 | $60.37 | $0.00 |
| Jun | 30 | $1,049.81 | $10.50 | $20.71 | $80.00 | $1,100.51 | $61.21 | $0.00 |
| Jul | 31 | $1,100.51 | $11.01 | $28.03 | $41.00 | $1,169.55 | $89.04 | ($80.04) |
| Aug | 31 | $1,089.51 | $10.90 | $27.75 | $0.00 | $1,117.26 | $38.65 | ($38.65) |
| Sep | 30 | $1,078.61 | — | — | — | — | — | — |
4. How Late Payments Increase Your Balance
Using a similar example, if you make at least the minimum payments required, but say your February payment (next table) is 15 days late, your March interest charge is nearly $30 instead of about $20, your total owed goes up (March to April) by nearly $10, and your minimum payment increases from about $30 to nearly $40.
Here too, going back to timely minimum payments puts you back on track to (slowly) paying down your debt.
| Month | Days Until Paid | Principal | 1% of Principal | Interest | Penalty Fee | Total Owed | Min Pay | Change/Pay |
|---|---|---|---|---|---|---|---|---|
| Jan | 31 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $1,000.00 |
| Feb | 28 | $1,000.00 | $10.00 | $0.00 | $0.00 | $1,000.00 | $10.00 | ($10.00) |
| Mar | 46 | $990.00 | $9.90 | $29.94 | $0.00 | $1,019.94 | $39.84 | ($39.84) |
| Apr | 30 | $980.10 | $9.80 | $19.33 | $0.00 | $1,029.43 | $59.13 | ($59.13) |
| May | 31 | $970.30 | $9.70 | $19.78 | $0.00 | $990.08 | $29.48 | ($29.48) |
| Jun | 30 | $960.60 | Etc. | — | — | — | — | — |
Here, Tim Dyer, Wealth Manager at Dyer Wealth Management, adds:
If you fail to pay a balloon payment on time, you may be charged fees and possibly high interest.
5. Paying Less Than the Minimum Payment Due
Here, we assume you make all payments on time, but in March, you pay $20 rather than the $30.08 minimum payment due.
The issuer slaps a $30 late-payment penalty on you, which bumps your total owed up nearly $30 from $1010.18 to $1039.71.
Again, once you restart making at least the minimum payments on time, your total owed resumes its downward creep.
| Month | Days Until Paid | Principal | 1% of Principal | Interest | Penalty Fee | Total Owed | Min Pay | Change/Pay |
|---|---|---|---|---|---|---|---|---|
| Jan | 31 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $1,000.00 |
| Feb | 28 | $1,000.00 | $10.00 | $0.00 | $0.00 | $1,000.00 | $10.00 | ($10.00) |
| Mar | 31 | $990.00 | $9.90 | $20.18 | $0.00 | $1,010.18 | $30.08 | ($20.00) |
| Apr | 30 | $990.18 | $9.90 | $19.53 | $0.00 | $1,039.71 | $59.43 | ($59.43) |
| May | 31 | $980.28 | $9.80 | $19.98 | $0.00 | $1,000.26 | $29.78 | ($29.78) |
6. Deferred Payments: Why Student Loan Balances Grow While You’re in School
Another related way that your balance can grow is if the lender agrees to let you defer your payment partially or in full, but interest continues to accrue. This is better than missing payments because your lender’s agreement means they won’t apply any late-payment penalties and won’t increase your APR.
Private student loans are a perfect example of deferment.
Different from government-subsidized student loans, where the government covers your interest while you’re in school, private student loans (and unsubsidized federal ones) let you defer payment until you graduate.
However, while that makes it easier in the short term (since paying hundreds of dollars a month when you’re a full-time student is hard), your interest continues to accrue until you graduate, making your balance far higher once you start repaying.
For example, say you have a $30,000 student loan with a 7.5% fixed rate; the lender lets you defer payment until you graduate four years later, and you then have ten years to pay it off.
By the time you graduate, your $30,000 loan balance mushrooms to over $40,000!
How about your monthly payments?
Let’s compare three scenarios:
- If you start paying immediately: you pay $288.94 for 14 years.
- If you pay interest only while in school: you pay ~$188 a month until graduation, then $356.11 for 10 years.
- If you pay nothing while in school: your monthly payment is $475.57 for 10 years.
7. Negative Amortization: When Payments Don’t Cover the Interest
In some situations, a lender may agree to accept smaller payments than the interest that accrues each payment period.
For example, if the interest accrued on a $10,000 loan is say $50 a month and the lender lets you pay only $30 (possibly because you’re in financial hardship and can’t make the full payment), your balance grows by the $20 interest you fail to pay.
Continue this for months or years, and your total balance may double or triple. This process is known as negative amortization because instead of gradually paying off the loan, your debt keeps growing.
Worse, each month it grows faster than the previous one.
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The Bottom Line: Use Debt Strategically and Avoid a Debt Spiral
Used well, debt can be a smart tool that offers many benefits and even perks.
However, if you fall into high-interest debt and/or can’t make at least your monthly minimum payments, you will definitely pay a high price for it, and likely fall into a debt spiral, with ever-growing debt balances. The above illustrates seven ways your loan balance can grow, rather than decrease over time.
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Frequently Asked Questions
What makes a loan balance increase?
The article lists seven causes: borrowing more, no longer paying your credit cards in full each month, missing payments, making late payments, paying less than the minimum due, deferred payments and negative amortization. In each case, interest (and sometimes penalty fees) is added to what you owe faster than your payments reduce it.
Does missing a credit card payment increase what you owe?
Yes. Unpaid interest is added to your balance and the issuer charges a late fee, $30 for the first miss in the article’s example and $41 after that. After repeated misses, the APR can jump to a penalty rate (29.99% in the example) that typically lasts until you make about six on-time payments in a row.
What happens if you pay less than the minimum payment due?
If you make a payment on time but it’s below the minimum due, the issuer can charge a late-payment penalty. In the article’s example, paying $20 instead of a $30.08 minimum triggers a $30 penalty that pushes the balance from $1,010.18 to $1,039.71. Once you resume at least minimum payments on time, the balance starts creeping down again.
Why does a student loan balance grow while you’re in school?
With private student loans and unsubsidized federal loans, you can defer payments until you graduate, but interest keeps accruing. In the article’s example, a $30,000 loan at 7.5% grows to over $40,000 after four years of deferment. With government-subsidized student loans, the government covers the interest while you’re in school.
What is negative amortization?
Negative amortization happens when a lender lets you pay less than the interest that accrues each period, so the unpaid interest is added to your balance. Instead of gradually paying off the loan, your debt keeps growing, and each month it grows faster than the month before. Continued for months or years, the balance can double or triple.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.