A Shift report concluded that as of September 2020, 70% of US adults maintained at least one open credit card account, with 34% of consumers carrying more than three credit cards. Of those with credit cards, 37% do not pay the balance in full each month, making them subject to interest on the revolving balances.
To better understand how credit card companies calculate interest charges and payments, we have created a detailed guide to explain credit card minimum monthly payments and why it is so hard to eliminate credit card debt.
- Paying off your credit card account in full by making only the required Minimum Monthly Payment each month can take decades and may cost many times the original purchase amount due to compounding interest charges.
- Daily Compounding Interest can add significantly to your balance each month, even if you don't make any additional purchases.
- The Percentage of the Minimum Balance required as part of the minimum monthly payment calculation is usually very low, and reduces the outstanding balance very slowly, stretching out the time it takes to pay off your credit card account.
- Late Fees and Over Limit Fees can also tack on additional charges that grow your balance, causing further delays in paying off your credit card.
- If you struggle to just make the required minimum monthly payments each month, this may be a warning sign that you are overburdened with debt and may be unable to effectively service your debt.
- If you struggle to make minimum payments, or fall behind making your minimum payments from time to time, it may be time to reach out for help from a qualified debt relief company.
Methods Credit Card Issuers Use to Calculate the Minimum Monthly Payment
Lenders use one of the following methods to calculate your minimum payment. These terms and an explanation of how purchase charges, balance transfers, cash advances, interest and penalties are calculated can be found in your cardholder agreement. Most companies provide these details online, which may be accessed when you log into your account online.
- Daily Balance (including current transactions)or Percentage of Balance + Finance Charge + Fees.
- Percentage of balance.
What Factors are Used to Calculate Your Minimum Monthly Credit Card Payment?
- The Current Balance includes all posted purchases, minus payments, or credits in the current billing cycle.
- Average Daily Balance is the figure used to calculate interest on the account. Credit card issuers add the balance each day in the statement period divided by the number of days in the statement cycle.
- Purchases This Billing Cycle will include all posted transactions.
- Days in the Billing Cycle: Legally, credit card companies must provide the same due date each month. The billing cycle is consistent with the number of days in any given month, ranging from 28 to 31 days.
- Interest Rate for Purchases: Purchases include transactions that buy something. Except for transactions made during a promotional period, you pay the same interest rate on all purchases.
- Interest Rate for Cash Advances: When you use a credit card to withdraw cash at a bank or ATM it is considered a cash advance and comes with a higher interest rate. Cash advances begin charging interest on the date of the withdrawal.
- Daily Periodic Interest Rate breaks down the annual percentage rate (APR) into a daily interest rate the company uses to calculate finance charges. To find the daily periodic interest rate divide the APR by 365 to determine the daily rate. The interest is added to the balance at the end of each day, resulting in interest compounding daily.
- The Low Balance Minimum Payment is the lowest amount you could pay on your bill. The minimum payment is the greater of the low balance minimum payment or the minimum payment based on the calculation methods used. The low balance minimum could be as high as $50 or as low as $5. If the total balance falls below the low balance minimum, the full account balance becomes due.
- Late Payment Fees: Credit cards do not offer a grace period. Any payment arriving after the due date will result in a late payment penalty. Charges range from $28 to $39, with an average of $36.
- The Method of Calculation Used: Credit card issuers use either the daily balance, including current transactions, or a percentage of the average daily balance.
- The Percentage of the Current Balance Used: Credit card issuers charge between 1% and 3% of the average daily balance to determine the minimum payment due. Companies using a percentage of the balance will generally use a higher percentage than those using the daily balance, including current transactions.
How the Minimum Payment on Your Credit Card is Calculated
Daily Balance (including current transactions) or Percentage of Balance + Finance Charge + Fees: Credit card issuers using this method to calculate the minimum payment start with a percentage of the average daily balance. Then add finance charges and fees to establish the minimum monthly payment.
Example: A balance of $5,000, with an interest charge of $30, a late fee of $35, and a minimum payment calculation using 1% of the average daily balance, the minimum payment would be $115. ($5,000 X 1%) + $30 + $35).
Percentage of Balance: Credit card issuer using a flat percentage will calculate the minimum payment based on your total balance, including interest and fees.
Example: A balance of $5,000, with an interest charge of $30, a late fee of $35, and a minimum payment calculation using 2% of the average daily balance, the minimum payment would be $101.30. ($5,000 + $30 +$35) X 2%).
Most lenders use the percentage plus interest and fees and use a lower percentage to calculate the minimum payment.
How Payments Are Applied to Your Account
Lenders do not treat all credit card transactions the same, charging different interest rates based on the transaction type. The five most common transaction categories include purchases, promotional purchases, balance transfers, and cash advances. Each comes with different terms and interest rates that affect the cost of the debt.
- Purchases include anything you buy. With credit cards, you can avoid interest charges when you pay the account in full each month. Any revolving balance will eliminate the grace period, with interest accruing from the date of purchase.
- Promotional Purchases include items bought during a promotional period. Often offered on new accounts, purchases receive the promotional interest rate until the end of the promotion. The standard purchase interest begins at the end of the promotional period on any remaining balance.
- Deferred Interest Purchases offer short term zero percent financing, provided you repay the balance in full by the end of the promotional period. If there is any balance remaining, you pay interest at the standard purchase rate from the date of purchase on the entire amount.
- Balance transfers move a balance from one credit card to another. In some cases, you can complete a balance transfer to your checking account and still qualify for the promotional rate. Transfers include an up-front fee, which is typically a percentage of the amount transferred. You also receive a promotional interest rate for 6 to 18 months that could be as low as zero percent. Once the promotional period ends, the rate reverts to the standard purchase rate on any remaining balance.
- Cash advances also charge an upfront transfer fee and tend to charge the highest rate of interest.
Your statement will breakdown the balances held across each transaction category.
The CARD Act imposes rules on how the company must distribute your payment across different transactions.
Credit card issuers first divide the payment into two parts: the minimum payment and any amount paid over the minimum. The Card Act requires companies to apply excess amounts over the minimum payment the balance with the highest interest. The minimum payment can go toward any balance the company chooses, which is typically the lowest interest rate transactions.
Deferred interest charges are the exception to this rule. In the two billing cycles before the end of the deferred interest promotion, companies must allocate any payment above the minimum toward deferred interest purchases allowing you to pay off the balance while still having other charges on the account.
Factors That May Cause Your Minimum Monthly Credit Card Payment to Increase
- Fees: Credit card issuers calculate your minimum payment based on your account balance plus finance charges and fees. A late payment (even by one day) could result in the late fee being added to the minimum amount due, raising the minimum amount due.
- Over the Limit: Lenders often add balances that are over your credit limit to your minimum payment.
- Balance: Continuing to use your credit card could increase the minimum payment. The minimum payment calculation uses your average daily account balance as the primary factor in the minimum payment required.
- Interest rates. Credit cards have variable interest rates based on the Prime rate plus a margin. The margin does not change. However, when the federal reserve raising interest rates, your credit card rate will rise. Credit card companies tend to adjust rates either monthly or quarterly.
How to Find Out How Your Credit Card Minimum Monthly Payment is Calculated
The CARD (Credit Card Accountability Responsibility and Disclosure) Act establishes regulations that require transparency and the disclosure of credit card terms. The Act requires companies to include your balance, interest owed, minimum payment, and the due date in an easy-to-read format on every monthly statement.
The cardholder agreement and account disclosures also detail how the credit card issuer calculates the minimum payment. You can find the disclosures on the card issuer website.
Here is an example of a credit card disclosure from Citibank:
How We Will Calculate Your Balance: We use a method called “daily balance (including new transactions).”
Loss of Introductory APR: We may end your introductory APR and apply the Penalty APR if you make a late payment.
Payment Allocation: We may apply the portion of your payments up to your Minimum Payment Due to lower APR balances first. Generally, payments above your Minimum Payment Due will be applied to your highest APR balance first.
Prime Rate: The variable rates shown here are accurate based on a 3.25% Prime Rate.
|a We add 11.99% to the Prime Rate to determine the Purchase/Balance Transfer/Citi Flex Plan APR.|
|b We add 21.99% to the Prime Rate to determine the Cash Advances APR.|
|c We add up to 26.74% to the Prime Rate to determine the Penalty APR.|
|Variable rate APRs will not exceed 29.99%.|
What Are Your Rights Regarding Credit Card Minimum Payments?
The CARD Act establishes fair and transparent practices in the cred card industry. It offers consumer protections such as caps on late and over the limit fees and regulates the allocation of payments,
The Act requires companies to include the following disclosures in all monthly statements:
- Payoff information: Statements must include the time it will take to pay off the account, only making the minimum payment compared to a three-year payoff.
- Cost analysis: Statements must include the total cost, including interest charges, for both the minimum payment and three-year pay off schedule.
- Provide a toll-free numbergiving customers information about credit counseling and debt management services.
- Allocation of paymentsrequires the company to contribute any amounts above the minimum toward the highest APR balances.
What Happens If You Miss or Pay Less Than the Required Minimum Monthly Payment
Credit card companies do not grant a payment grace period. Any payment of less than the minimum or after the due date will result in a late fee. Current late fees range from $28 to $39, with the average being $36 per event.
Late penalties can increase the minimum payment, and you pay interest on late fees from the date the infraction occurred.
What is the Difference Between a Delinquency and Charge Off?
Another factor determining your minimum payment and interest charges is the account status.
Current accounts: The above minimum payment calculations apply to accounts with current payments. Missing payments will incur late fees but can also affect your interest rate.
An account becomes delinquent when you miss a payment. To bring the account current you must make the missed payments, plus late fees and interest. If penalties cause the account to exceed the credit limit, the company could require you to pay the overage, which could significantly increase the amount you must pay.
Default status occurs after missing two consecutive payments, making the account 60 days late. In default, the company begins charging the default interest rate, which can be as high as 30% on the full account balance. You must make six on-time payments before the default interest rate reverts to the standard purchase rate. The account remains in default until it reaches charge-off.
When an account goes 180 days without a payment, the company will charge-off or write-off the account. Once the account reaches charge-off status, interest and late fees stop accruing, and the balance remains the same in the future.
A charge off does NOT result in absolved debt. The creditor can hire a debt collection agency to collect the debt, sell the account to a debt buyer, or could choose to initiate legal action against you. The lender can make efforts to collect the debt forever. However, they have a limited time to sue as a remedy to recover the amount owed under each state’s statute of limitations.
Why It Takes So Long to Pay Off Credit Cards if You Only Make the Minimum Monthly Payment?
The ease of use is one of the most attractive features of a credit card and also the biggest hindrance to living a debt-free life. It is easy to buy everyday items on a credit card and pay for them later. This convenience can leave you trapped in debt indefinitely.
Carrying a balance from month to month, or having revolving debt, means you pay interest from the date of each purchase. The double-digit interest compounds daily, while the company only requires 1% or so of the balance to be paid by the due date.
The required minimum payment barely covers the interest charges and does not facilitate the reduction of your balance. Paying 1 to 3% of the balance when the credit card issuer charges 15 to 30% interest in interest compounded daily could leave you perpetually in debt.
Why You End Up Paying So Much When You Only Make the Minimum Credit Card Payment
A low minimum payment makes credit card debt affordable in terms of how much you owe each month. However, the high-interest rates make credit cards one of the most expensive forms of debt outside of payday loans.
Loans require the same payment each month. As time passes, you pay a little less in interest and a little more in principal reduction. Credit cards don’t work the same way because the minimum payment falls as the balance declines, leaving little to pay down the debt.
Relying on the minimum payment method could result in paying 3X the original charges and take 30 years or more to eliminate your credit card debt, even if you never make another charge on the account.
Use the Minimum Payment Calculator Above to See How Long It Will Take and How Much It Will Cost to Pay Off Your Credit Card Debt Making Only Minimum Payments Each Month
Depending on your current balance, interest rate and how much you charge each month in addition to your current balance, it could take 20, 30, or 40 years or more to pay off your credit balance in full if you just make the minimum monthly payment each month. In addition to being straddled with high interest credit card debt for decades, you will end up paying many times your current balance in interest charges, even if you make all payments in a timely manner.
Scroll to the top of the page and input your current balance, interest rate for purchases and the lowest minimum payment required by your credit card company each month to see how long it will take to pay off your balance and how much in total payments and interest you will pay if you only make the minimum payment required each month.
What to Do If You Can’t Make the Minimum Monthly Payment on Your Credit Card
Ask for Help – Contact your creditor for assistance. Creditors will generally work with you on a short-term problem that lasts one or two months. The company might waive a late fee if you have not missed any payments in the previous 12 months. Other solutions might include a temporary forbearance of payments or re-aging the account reduce or eliminate fees and some interest to get you back on track.
Credit Counseling Agencies work with consumers struggling to keep up with payments who have a longer-term financial crisis. You must repay the full amount owed plus some interest, but you could save money with creditor concessions like waived late fees and a lower interest rate on outstanding debts. If you qualify, you must repay all creditors within 60 months of enrolling. Failing to complete the program will lead to adding back any waived fees and interest.
Negotiate the Debt. Consumers who cannot qualify for credit counseling, but have experienced a recent hardship, may find debt settlement is a better option. When a financial crisis lasts more than a few months, companies become receptive to negotiating a lower payoff to avoid high debt collection costs. It is possible to settle multiple debts, even with high balances, for less than the full amount owed, and most people complete a debt settlement program within 24-48 months.
Debt settlement is best suited for people who have recently experienced some type of financial hardship, such as the loss of a job or reduction of hours, high medical bills, a full or partial disability, divorce, death of a family member or spouse, or a financial displacement due to the loss of a business or other impact from the global pandemic. Debt settlement may help you avoid bankruptcy and can be quicker to complete and cost less than paying off debt through a debt management plan through a credit counseling agency.
- What is a Credit Card Minimum Payment?
A credit card minimum payment is the smallest payment you are required to make during each monthly billing cycle to avoid accruing any penalties or fees. This amount is calculated using a percentage of your current balance, the daily interest charges accrued during the billing cycle, and any penalties or fees accrued during the billing cycle. The method of calculations used as well as the low balance minimum payment required can all be found in the cardholder agreement.
- Does Making Only the Minimum Payment on My Credit Card Each Month Hurt My Credit Scores?
Your credit score considers several key factors: your payment history and the ratio between your debt balances and available credit, also called the utilization ratio. Making the minimum payment will result in a clean repayment history. However, when your utilization ratio is above 30%, it will negatively affect your credit score. Most consumers making minimum payments on credit card debt have high utilization.
- Can I Lower the Minimum Monthly Payments on My Credit Cards?
The best way to lower the minimum payment on credit card debt is to pay down the balance. The minimum payment consists of a percentage of your average daily balance plus interest and fees. Balances over the credit limit can also increase your minimum payment.
- Why Do Credit Card Balances Grow So Fast?
Credit card balances grow fast because the company only requires you to pay a small percentage of the balance each month but charges you high rates of interest that compounds daily. Very little of the monthly minimum payment reduces the debt.
- Why Are Credit Cards So Hard to Pay Off?
The combination of double-digit interest compounded daily and low minimum monthly payments make credit cards hard to pay off. Eliminating credit card debt requires enough discipline to pay more than the minimum payment and only charging what you can pay off when the bill comes due.