Credit Card Minimum Payment and its Effects

What do you understand by credit card minimum payment? Why do the credit card companies encourage minimum payment? What effects does the credit card minimum payment have on your finance? These are the questions this article is about to address. We shall be answering the question one after the other.

What is credit card minimum payment?

Credit card minimum payment just as the name implies the minimum amount that your card issuer expects you to pay every month towards the repayment of your card balance. In most cases, it is usually expressed as a percentage of card balance. The rates vary among card companies but it is usually within the range of two to five per cent. On the other hand, your card issuer may expect that you pay at least a minimum of certain fixed amount towards repayment of your card balance. However, if the fixed amount is less than the amount payable when the credit card minimum payment is expressed as a percentage, then the later will apply. In essence, the credit card minimum payment will be the higher of the fixed amount and the amount payable when a fixed percentage is applied. Let me illustrate it with this example. Let’s assume that your card balance is $1,200 with 12% APR and the credit card minimum payment is set at the higher amount between 2% of the card balance and $15, your minimum payment will be calculated as follows:

2% of $1,200 is $24. If you compare $24 with the fixed amount of $15, you will realise that $24 is higher. That means your credit card minimum payment will be $24. However, as you keep paying, your card balance will be reducing gradually. It will get to a point where the 2% of the card balance will be less than $15. At that point, the credit card minimum payment that will be applied will become $15. To get the interest charge for each month, you need to divide the APR by 12. For better understanding of how it works, you can look at the table below:

Calculation of credit card minimum payment

Month Initial Balance APR @ 12% Interest Amount Ending Balance Minimum Payment @ 2% or $15
1 1,200.00 0.01 12.00 1,212.00 24.00
2 1,188.00 0.01 11.88 1,199.88 23.76
3 1,176.12 0.01 11.76 1,187.88 23.52
4 1,164.36 0.01 11.64 1,176.00 23.29
5 1,152.72 0.01 11.53 1,164.24 23.05
6 1,141.19 0.01 11.41 1,152.60 22.82
7 1,129.78 0.01 11.30 1,141.07 22.60
8 1,118.48 0.01 11.18 1,129.66 22.37
9 1,107.29 0.01 11.07 1,118.37 22.15
10 1,096.22 0.01 10.96 1,107.18 21.92
11 1,085.26 0.01 10.85 1,096.11 21.71
12 1,074.41 0.01 10.74 1,085.15 21.49
13 1,063.66 0.01 10.64 1,074.30 21.27
14 1,053.03 0.01 10.53 1,063.56 21.06
15 1,042.49 0.01 10.42 1,052.92 20.85
16 1,032.07 0.01 10.32 1,042.39 20.64
17 1,021.75 0.01 10.22 1,031.97 20.43
18 1,011.53 0.01 10.12 1,021.65 20.23
19 1,001.42 0.01 10.01 1,011.43 20.03
20 991.40 0.01 9.91 1,001.32 19.83
21 981.49 0.01 9.81 991.30 19.63
22 971.67 0.01 9.72 981.39 19.43
23 961.96 0.01 9.62 971.58 19.24
24 952.34 0.01 9.52 961.86 19.05
25 942.81 0.01 9.43 952.24 18.86
26 933.39 0.01 9.33 942.72 18.67
27 924.05 0.01 9.24 933.29 18.48
28 914.81 0.01 9.15 923.96 18.30
29 905.66 0.01 9.06 914.72 18.11
30 896.61 0.01 8.97 905.57 17.93
31 887.64 0.01 8.88 896.52 17.75
32 878.76 0.01 8.79 887.55 17.58
33 869.98 0.01 8.70 878.68 17.40
34 861.28 0.01 8.61 869.89 17.23
35 852.66 0.01 8.53 861.19 17.05
36 844.14 0.01 8.44 852.58 16.88
37 835.70 0.01 8.36 844.05 16.71
38 827.34 0.01 8.27 835.61 16.55
39 819.07 0.01 8.19 827.26 16.38
40 810.87 0.01 8.11 818.98 16.22
41 802.77 0.01 8.03 810.79 16.06
42 794.74 0.01 7.95 802.69 15.89
43 786.79 0.01 7.87 794.66 15.74
44 778.92 0.01 7.79 786.71 15.58
45 771.13 0.01 7.71 778.85 15.42
46 763.42 0.01 7.63 771.06 15.27
47 755.79 0.01 7.56 763.35 15.12
48 748.23 0.01 7.48 755.71 15.00
49 740.71 0.01 7.41 748.12 15.00
50 733.12 0.01 7.33 740.45 15.00
51 725.45 0.01 7.25 732.71 15.00
52 717.71 0.01 7.18 724.88 15.00
53 709.88 0.01 7.10 716.98 15.00
54 701.98 0.01 7.02 709.00 15.00
55 694.00 0.01 6.94 700.94 15.00
56 685.94 0.01 6.86 692.80 15.00
57 677.80 0.01 6.78 684.58 15.00
58 669.58 0.01 6.70 676.27 15.00
59 661.27 0.01 6.61 667.89 15.00
60 652.89 0.01 6.53 659.42 15.00
61 644.42 0.01 6.44 650.86 15.00
62 635.86 0.01 6.36 642.22 15.00
63 627.22 0.01 6.27 633.49 15.00
64 618.49 0.01 6.18 624.68 15.00
65 609.68 0.01 6.10 615.77 15.00
66 600.77 0.01 6.01 606.78 15.00
67 591.78 0.01 5.92 597.70 15.00
68 582.70 0.01 5.83 588.53 15.00
69 573.53 0.01 5.74 579.26 15.00
70 564.26 0.01 5.64 569.90 15.00
71 554.90 0.01 5.55 560.45 15.00
72 545.45 0.01 5.45 550.91 15.00
73 535.91 0.01 5.36 541.27 15.00
74 526.27 0.01 5.26 531.53 15.00
75 516.53 0.01 5.17 521.69 15.00
76 506.69 0.01 5.07 511.76 15.00
77 496.76 0.01 4.97 501.73 15.00
78 486.73 0.01 4.87 491.60 15.00
79 476.60 0.01 4.77 481.36 15.00
80 466.36 0.01 4.66 471.03 15.00
81 456.03 0.01 4.56 460.59 15.00
82 445.59 0.01 4.46 450.04 15.00
83 435.04 0.01 4.35 439.39 15.00
84 424.39 0.01 4.24 428.64 15.00
85 413.64 0.01 4.14 417.77 15.00
86 402.77 0.01 4.03 406.80 15.00
87 391.80 0.01 3.92 395.72 15.00
88 380.72 0.01 3.81 384.52 15.00
89 369.52 0.01 3.70 373.22 15.00
90 358.22 0.01 3.58 361.80 15.00
91 346.80 0.01 3.47 350.27 15.00
92 335.27 0.01 3.35 338.62 15.00
93 323.62 0.01 3.24 326.86 15.00
94 311.86 0.01 3.12 314.98 15.00
95 299.98 0.01 3.00 302.98 15.00
96 287.98 0.01 2.88 290.86 15.00
97 275.86 0.01 2.76 278.62 15.00
98 263.62 0.01 2.64 266.25 15.00
99 251.25 0.01 2.51 253.76 15.00
100 238.76 0.01 2.39 241.15 15.00
101 226.15 0.01 2.26 228.41 15.00
102 213.41 0.01 2.13 215.55 15.00
103 200.55 0.01 2.01 202.55 15.00
104 187.55 0.01 1.88 189.43 15.00
105 174.43 0.01 1.74 176.17 15.00
106 161.17 0.01 1.61 162.78 15.00
107 147.78 0.01 1.48 149.26 15.00
108 134.26 0.01 1.34 135.61 15.00
109 120.61 0.01 1.21 121.81 15.00
110 106.81 0.01 1.07 107.88 15.00
111 92.88 0.01 0.93 93.81 15.00
112 78.81 0.01 0.79 79.60 15.00
113 64.60 0.01 0.65 65.24 15.00
114 50.24 0.01 0.50 50.74 15.00
115 35.74 0.01 0.36 36.10 15.00
116 21.10 0.01 0.21 21.31 15.00
117 6.31 0.01 0.06 6.38 6.38
Total 744.92 1,944.92

Please note that you can use credit card minimum payment calculator to arrive at the same answer.

It will take you 9 years and 9 months before you can get out of the debt if you stick to the minimum payment agreement. Whao! This is quite a long time. Not only that, you must have paid interest charges amounted to $744.92. This is above 62% of the initial card balance.

Why do the credit card companies encourage minimum payment?

I think the table above has answered this question. Credit card minimum payment helps the card companies to maximize their interest income. The longer your debt, the more interest they earn from customers. Unfortunately, a lot of customers do not see it this way. They enjoy the debt as they find it more convenient to make the minimum payment. The only good aspect about the credit card minimum payment is that, the amount is so small that customers are able to pay. Therefore, there may not be incidence of missed or late payments which can further attract penalties.

Effects of credit card minimum payment on customers

If you think that your credit card issuer likes you by offering you minimum payment option, you better think twice. The credit card minimum payment arrangement is more advantageous to credit card companies than the customers they serve. Below are the effects which the minimum payment agreement will have on you.

Interest Payment

You will end up paying a large amount of interest. Don’t forget that the accrued interest on the card balance is already included in the monthly minimum payment. Therefore, only a small portion of the payments go to the repayment of the principal. What you are doing in essence is to service the debt and the credit card companies enjoy this. Imagine having a regular flow of interest income from a customer for more than nine years. The interest element keeps going down gradually as you keep paying down the loan. But if you make fresh purchases with the card, you may remain in debt perpetually.

Read Also: See How High Interest Rate Is Killing You

Longer Repayment Period

Credit card minimum payment is not a good option for anyone who wants to be debt free. No matter the amount, debt is debt. Having a debt hanging on your neck impairs your financial freedom. You cannot claim to be financially free when you have a debt that will take you years to repay. If you want to enjoy debt free living, you may need to pay more than the required minimum payment.

Credit Score

You may not know the impact the credit card minimum payment may be having on your credit score. The truth is that, the amounts you owe per time constitute thirty per cent of parameters used in calculating your FICO credit score. Failing to pay up your debt over a long period is an indication that you may be having financial crisis. This can take a hit on your credit score. This may also affect your debt-income ratio. If your debt-income ratio is too high, it may be difficult for you to be able to secure a fresh loan or new credit cards at affordable rates. Each time you approach a lender for loans, an inquiry will be placed on your credit. No financial institutions will be willing to extend loans to someone with a high debt-income ratio. They believe that such person may not be able to repay the loan as its credit is already maxed out. Besides, if you are searching for job or an apartment, prospective employers or landlords will like to place inquiry on your credit. You know what this can mean to you.

Read Also: Effects of Late Payment on Credit Score

Conclusion

If you are already got caught in the web of debt due to the credit card minimum payment syndrome, it is not too late for you to take corrective steps. I believe you can still do something about it. You can take the following steps:

  • Increase your monthly payment. The main reason you are in that debt is that you have been making just the minimum payment. If you want to get out of debt, this will not help you. If you increase your monthly payment, greater portion will be going to the repayment of the principal instead of just servicing the loan. The problem with minimum payment is that, the greater portion of your monthly payment is used to offset the interest charges.
  • Stop new purchases: You need to acknowledge that you are in debt already. So, any attempt to make new purchases with the card will further drag you into debt. It may become more difficult to come out of the debt. Nevertheless, if this is the only card you have, I will suggest that you don’t make large purchases with it. You can use it to buy small items such as groceries and ensure the purchases are fully paid at month end. At the same time, you need to stick with your new repayment plan. New purchases should not hinder your commitment to pay off the existing debt. You may need to cut down your expenses for now so that you don’t need to spend much. Every saving you make on your expenses should be channelled towards paying off the debt.
  • Transfer the debt to 0% balance transfer credit card: This will help you save interest on the debt. However, before you take this decision, you should be confident that you will be able to pay the card balance in full within the 0% introductory period. Also, you need to compare the interest you want to save with the fee you will need to pay as transfer fee on the amount you want to transfer. If the transfer fee is more than the interest charge, there will not be any reason for such transfer.

It is important to conclude by saying that credit card minimum payment may be a good option for you sometimes. If you have different debts, you may focus on paying down aggressively the debt with the highest interest rate while you make just minimum payment on the debts with lowest interest rates. However, as soon as you finish paying the debt with the highest interest rate, you should immediately increase the amount you repay on the other debts.

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