At first glance, credit cards’ payment flexibility seems like a great deal. Unlike installment debt, such as home loans or personal loans you might get from SoFi, credit cards don’t have fixed monthly payments. If you choose to carry a balance on your card, you can pay as much or as little as you like each statement cycle, provided you make at least the minimum balance due.
But therein lies the rub. Absent extraordinary temporary circumstances, such as an unexpected layoff or emergency expense for which there’s no realistic alternative financing option, paying just the minimum balance due is never advisable. That’s because the minimum balance due is, well, minimal relative to the total balance owed and regular finance charges. As a result, paying only the minimum drags out your payoff process and increases the amount of interest you incur.
The good news is that even if you’re unable to pay off your credit card balance, you almost certainly don’t have to make just the minimum payments. No matter how ineffectual it feels right now, even a modest increase in your monthly payment amount could significantly reduce your long-term financing costs and accelerate your progress toward full payoff.
Here’s what you need to know about how credit card issuers – lenders like Capital One and American Express, among others – calculate minimum balances due. This article also covers how to plan around variable minimum payments and what you can do to better manage your credit card balances with an eye to increasing your monthly payment, accelerating your progress toward debt payoff, and ultimately getting out of debt faster.
What Is a Credit Card Minimum Payment?
The minimum balance due is pretty self-explanatory: It’s the minimum payment you agree to put toward your credit card statement balance each month. Your minimum balance due is a function of your total outstanding balance at the statement due date. This outstanding balance may include:
- Principal plus interest carried over from previous statement cycles
- Interest accrued on past charges during the present statement cycle
- New charges made during the present statement cycle
- Overlimit charges, if any
- Fees charged during the present statement cycle, if any
Your credit card issuer may calculate your minimum balance in one or more ways, depending on their policy and your balance size. These methods are spelled out in your cardholder agreement – we’ll examine them in greater detail below.
Under federal guidelines, credit card issuers must avoid negative amortization, which happens when payments aren’t sufficient to cover interest charges. Card issuers’ minimum payment calculation formulas generally result in minimum payments just high enough to offset interest accrual without significantly reducing principal balances. Your credit card statement’s minimum payment warning box spells out how long it’ll take you to pay off your current balance if you make only the minimum payment, assuming you charge no further purchases to that card.
Minimum Payment Calculation Methods
There are four ways that credit card companies calculate minimum payment amounts. Each issuer is different, so refer to your cardholder agreement for details on your issuer’s calculation methods and the circumstances under which they use each method.
1. Full Balance
This method chiefly applies to balances below a predetermined minimum payment floor, most often $25. If your statement balance is $15 or $20 in this cycle, you’ll like have to pay it in full.
2. Fixed Amount
This method applies to modest balances, generally from $25 to $999, although it varies by issuer. Your issuer may impose a fixed minimum payment as long as the payment is sufficient to avoid negative amortization. The most common fixed minimum payment amount is $25, and the amount typically increases as balances rise.
3. Flat Percentage
This simple method applies most often to higher balances that don’t include elements that must be paid in full each month, such as fees and over-limit charges. Issuers may also apply it to more complex balances when it produces the highest minimum payment among a range of potential options.
Flat minimum payment multipliers are typically between 1.5% and 5%. If, for example, your statement balance is $5,000 and your minimum payment percentage is 2%, your minimum payment will be $5,000 x 0.02 = $100.
4. Percentage, Interest & Fees
This more complicated method includes a flat percentage plus accrued interest, fees, and over-limit charges, if any. Issuers usually require that you pay fees and over-limit charges by the due date for the statement cycle in which they occurred.
Issuers often use this method to calculate minimum payments on larger balances. For instance, the Chase Freedom cardholder agreement states that Chase “will calculate the minimum payment as the larger of: 1) $25 (or total amount you owe if less than $25); or 2) the sum of 1% of the new balance, the periodic interest charges, and late fees we have billed you on the statement for which your minimum payment is calculated.”
Under this rubric, the minimum payment on a $2,000 balance that accrued $20 in finance charges and no late fees during the present statement cycle would be ($2,000 x 0.01) + $20 = $40.
Real-World Example: The Citi Premier Card
What do minimum balance calculation options look like in practice? Per the Citi Premier Card’s cardmember agreement, the minimum payment on this card always includes any past-due amounts and any over-limit balances, plus the greater of:
- The entire new balance charged during the current statement cycle if that balance is under $25
- $25 if the new balance is more than $25
- 1% of the new balance (rounded to the nearest dollar), plus accrued interest or minimum interest, plus late fees, if any
- 1.5% of the entire new balance (rounded to the nearest dollar)
Using this rubric, the minimum payment on a $2,000 balance that accrued $20 in finance charges and no late fees would be ($2,000 x 0.01) + $20 = $40. On a lower-interest balance that accrued less than $10 in finance charges and no late fees during the statement cycle, the minimum payment would be ($2,000 x 0.015) = $30. That’s the lowest possible minimum payment on a balance of this size.
Why Your Minimum Payment Might Increase
If your credit card balance remains low, or you don’t carry a balance at all from month to month, then your minimum payment is not likely to change. Under certain circumstances, you may see a jump in your minimum balance due. Most minimum balance increases are attributable to one or more of the following conditions:
- Changes to the minimum payment calculation formula, which should be preceded by communication from the credit card issuer and updates to the cardholder agreement
- Late payment charges or other fees that must be paid in full during the present statement cycle
- An increase in the carried balance due to new charges
- An increase in the card’s APR due to changing interest rate benchmarks, declining cardholder creditworthiness, or other conditions
- Over-limit charges that must be paid in full during the present statement cycle
If it’s not clear why your minimum payment has increased, contact your issuer’s customer service department.
Calculating the Total Cost of Making the Minimum Payment
First, the good news: Your credit card issuer is required by law to include a minimum payment warning on every credit card statement it sends you. This warning includes two scenarios:
- You make no new charges and pay only the minimum payment until your balance is $0
- You make no new charges and pay a higher, but ostensibly manageable, payment each month until your balance is $0
For each scenario, you’ll see the total time it will take to pay off your balance and how much you’ll make in cumulative principal-plus-interest payments. The second scenario invariably promises a shorter payoff time lower cumulative payments, reinforcing the virtue of paying more than the minimum each month.
If you’re trying to calculate the minimum payment on a charge or set of charges that you haven’t yet made, use a free minimum payment calculator such as this one from CreditCards.com.
Now, the bad news: The results of your calculation may shock you. On a lark, I asked the calculator to tell me the total payoff cost and duration of a $5,000 balance carried at 17.49% APR with a 2% minimum payment multiplier and a $25 floor. It told me I’d pay about $11,100 in interest alone over 346 months – nearly 29 years.
Calculating Your Minimum Payment When You Continue to Spend
This relatively simple calculation grows more complex when you make new charges each month. To accurately forecast your minimum payments in future statement cycles, you’ll need to know:
- Your expected new charges, based on your monthly budget for each of the spending categories for which you use your credit card and any planned balance transfers or cash advances
- The portion of your balance that you’re required to put toward your minimum payment, expressed as a decimal (for instance, 2% is 0.02)
- Any fees or over-limit charges you expect to incur during the statement cycle
- Your monthly finance charge expressed as a decimal (your APR divided by 12) if your issuer doesn’t use the flat percentage method to calculate your monthly balance
As we’ll discuss in greater detail below, it’s not advisable under normal circumstances to make new charges when you’re unable to pay your balance in full by the statement due date, nor is it advisable to use a credit card for everyday budgeted spending if you’re unable to pay off your balance in full. However, if you must temporarily rack up credit card charges you can’t immediately pay off, you need to have a reasonable estimate of the bare minimum you’ll need to pay to remain in good standing.
Payment Application Order & Why It Matters
The exact cost of only making the minimum payment each month depends on the order in which your issuer applies minimum payments. Your cardholder agreement should spell out this order, but issuers like to give themselves some leeway, so expect your agreement to include vague language to the effect of “We determine how we apply your minimum payment.”
That said, issuers commonly apply minimum payments first to fees and over-limit charges, then to interest accrued during the present statement cycle, and then to balances in ascending APR order. For example, let’s say your most recent credit card statement includes:
- A $38 late payment fee
- $15 in new interest charges
- A $200 cash advance carried at 27.24% APR
- $2,000 in regular charges carried at 21.24% APR
In this case, your minimum payment will be sufficient to cover the late payment fee and interest charges, plus a portion of the 21.24% APR balance. If you pay more than the minimum, your issuer will likely apply the excess payment to the 27.24% APR balance. Since higher-APR balances are more expensive to carry, the benefit of paying more than the minimum is clear.
What Happens If You Don’t Make the Minimum Payment on Time?
Your cardholder agreement requires you to pay at least the minimum balance due by your statement due date. Failure to do so has consequences, the severity of which depend on the length of the lapse and the issuer’s policies. They include:
- Late Payment Fee. If you fail to make a payment by your statement due date, you’ll be on the hook for a late payment fee – usually not more than $40, and possibly graduated based on balance size. Some issuers may waive isolated late payment fees; call customer service to ask.
- Penalty Interest. If you miss two statement due dates in a row, you may incur penalty interest. Penalty interest accrues at a steep premium to regular interest – often 10 or 15 percentage points higher, depending on the issuer. Once imposed, expect this high interest rate to apply indefinitely – at least six months from the second missed payment. Luckily, not all issuers charge penalty interest.
- Damage to Your Creditworthiness. Your credit card issuer may report payments more than 30 days past due to the consumer credit bureaus responsible for maintaining your credit report. Since payment history is one of the most important components of your credit score, even a single missed payment could hurt your creditworthiness. Under normal circumstances, late payments remain on your credit report for seven years.
- Account Closure. Severe delinquencies – those longer than 180 days – will likely result in the closure of your account. Once this happens, the issuer charges off your debt and refers the balance to collections, putting a significant black mark on your credit report and setting you up to be hounded by hard-nosed collectors.
Tips to Better Manage Your Credit Card Balances
If it’s not already clear, carrying a credit card balance beyond the grace period is inadvisable under normal circumstances. And paying only the minimum balance due on carried balances is definitely inadvisable. But “inadvisable” is not synonymous with “unavoidable.” If circumstances beyond your control compel you to carry a credit card balance outside a 0% annual percentage rate (APR) promotional period, keep these pointers in mind.
1. Understand How Your Issuer Calculates Minimum Payments
First, familiarize yourself with your issuer’s minimum payment calculation methods. This information should be readily available in your plain-English cardholder agreement. If there’s any ambiguity, contact the issuer’s customer service department and ask point-blank for the minimum payment multiplier and payment application order.
2. Know Your Billing Cycle’s Start & End Dates
Know when your billing cycle begins and ends. Understanding when new charges will hit your account is key to sound minimum payment estimates. Since carried balances accrue interest every day, it may help you reduce interest charges by front-loading payments, as well.
3. Pay on Time, Every Time
Even if you can’t pay your statement balances in full every month, be sure to make at least the minimum payment – or more than the minimum payment whenever possible – by the statement due date. The only thing worse than paying the bare minimum is missing the last day to do so without penalty.
4. Stop Making New Charges on Cards With Carried Balances
Circumstances beyond your control, such as job loss or a major unexpected expense that can’t be deferred or absorbed by emergency savings, may temporarily force you into debt. What you do once the urgency recedes is crucial. Stop making new charges on any card with a carried balance until that card’s balance has been paid off in full. Once the balance is back to zero, you can feel free to make new charges, provided you pay them off in full each statement cycle.
5. Use a Loan Payment Financial Calculators for Motivation
Use a loan repayment calculator to run a range of repayment scenarios and motivate yourself to pay significantly more than the minimum month after month. Credit Karma’s debt repayment calculator lets you calculate a monthly payment around a desired payoff time frame. It’s a good reminder that you don’t have to pay the bare minimum, and it gets you thinking about all the things you could do with your funds if they weren’t consumed by interest charges.
6. Pay As Much As You Can Afford
Motivation or no, put as much toward your credit card balances each month as you can without falling behind on other non-negotiable obligations, such as installment loans, rent, and insurance. Look for opportunities to trim discretionary spending wherever possible – for instance, by eating out less often or not at all, learning to make your favorite gourmet coffee at home, and getting comfortable in thrift stores. You can even use apps like Billshark to help you reduce some of your bills.
7. Use 0% APR Balance Transfer Credit Cards to Shrink or Eliminate Carried Balances
If your credit allows, consider applying for a credit card with a long 0% APR introductory balance transfer promotion. Some low-APR credit cards, such as Citi Simplicity, offer 0% APR promotions stretching as long as 21 months from account opening.
The catch is that issuers typically reserve these offers for creditworthy applicants. If your FICO credit score is much below 700, you’re unlikely to qualify for a generous balance transfer offer.
Another thing to keep in mind about 0% APR balance transfer promotions is that in some cases, issuers charge interest retroactively, socking you with an eye-popping interest bill if you fail to pay off a transferred balance before the promotional period ends. Avoid transferring balances that you’re not confident you’ll be able to pay off in time.
Just as every responsible driver should know how to perform an emergency tire change on the roadside, every responsible consumer should understand how to calculate the minimum payment on a carried credit card balance.
Of course, the best scenario is to avoid putting yourself in this situation to begin with. It can’t be stressed enough: Under normal circumstances, you shouldn’t even carry credit card balances at regular APR, let alone make only the minimum payment on them. Avoiding debt in the first place is the surest way to avoid its unpleasant complications.