The Minimum Payment

Millions of us have at least one credit card, and many of us have more than one. Every month the statements arrive telling us how much we owe and how much to pay. It is easy, especially in today’s world of COVID-19 when things are tough, to just pay the minimum and hope things will get better next month. For many of us, though, that has become a habit we have lived with for a long time: pay the minimum and forget about it until next month. When you understand ‘the minimum payment’ issue in detail, you can make good decisions about making a credit card minimum payment and what impact that has on your finances.  Before we look at minimum card payment, let us remind ourselves of the big picture.

Credit Card Rules and Standards

The Basics

Each credit card company tells its customers everything they need to know in card agreement. The vast majority of us never read the small print. The agreement, basically, says:

  • We can use the card to pay for goods and services, and sometimes to get cash, up to a set amount. That set amount is our card limit.
  • If we exceed the approved card limit, the purchase or cash advance will probably be rejected.
  • Some card agreements have membership or other annual fees which are added to the card balance when they are due.
  • All purchases which have not been paid off by the monthly due date attract interest at a predetermined rate called the APR or Annual Percentage Rate.
  • The APR varies according to company policy and your credit rating. Usually, the higher your rating, the lower the APR.
  • All cash advances incur interest as soon as the cash is taken.

Your Monthly Statement

Every month you receive  a statement showing::

  • Any unpaid balance from last month (made up of purchases, cash advances and accrued interest.)
  • All transactions, cash advances, and any transfers from other credit cards this month (called principal).
  • The amount of interest incurred this month on that principal.
  • The new total balance made up of all transactions plus the latest interest calculation.
  • The minimum payment which must be paid by the due date to avoid additional penalties. The minimum may be a percentage of last month’s balance or a flat figure, such as $25, if the minimum calculated amount is less than the minimum required amount which must be paid.

Many people often, or just sometimes, have to pay the minimum. It is important to know how the credit card company calculates the minimum payment and what the result is of only making the minimum.

Calculating the Minimum Payment

Your credit card agreement will explain how the minimum is calculated and by when (called the due date) they must receive the money. It will be a percentage of the total balance, say 3%, or will be the flat figure already mentioned. Minimum payments can go up and down each month in line with this month’s purchases and last month’s payment.

It can help to plan ahead if you think you may need to pay only the minimum next month. Here is a simple way to give you a good idea how much you will need for a minimum:

  • Look at your last month’s statement to check the APR.
  • Divide the APR by 12 to get this month’s interest rate.
  • Check last month’s statement balance due to be paid after you deduct the payment you did make.
  • Add last month’s purchases and advances to give you what your next statement will show.
  • Multiply that number by the monthly interest which the card company will add.
  • Multiply that by the minimum payment percentage.
  • Now you can plan so you have enough for next month’s minimum payment.

What Can Stop You From Making the Minimum Payment?

Some problems are severe and can last a long time. Losing a job, being furloughed, having a major bill to cover medical bills or a major vehicle repair are some common examples. Some things creep up because we take our eye off the ball. A common example is when you take out a new credit card with a low or zero APR. The introductory rate can make monthly payments easier, but they can also encourage you to take on more debt than you would. 

Your card debt builds and, then you see an 18% or 24% APR kick in. Now, the monthly payments have increased, and unless you allowed for it in your other budgeting, you may find yourself faced with paying one or more large credit card charges or utility bills.

What Happens if You Only Pay the Minimum

Basically, your debt will take longer to pay off, and you will pay more interest on the purchases than you would do. When you make a payment, it goes towards unpaid interest. Any of your payment that is left will be used to reduce the unpaid principal beginning with the oldest purchase or advance. All unpaid principal will incur more interest next month.

The Credit Card Accountability and Responsibility Act (CARD Act) requires credit card companies to explain the effect of only making minimum payments. To take a simple example, let’s say you have a principal of $1500, an APR of 18%, and a minimum payment requirement of 3%, then two months’ minimum payments would look like this:

  1. $1500.00 X 1.5% monthly interest ($22.50) X 3% minimum payment ($45.67) = $1476.83 balance carried forward to next month.
  2. $1476.83 X 1.5% monthly interest ($22.15) X 3% minimum payment (($44.97) = $1454.01 balance carried forward.

The net result is you paid $90.64 in two minimum payments, but you only reduced your principal owed by $45.99.

If your APR is 24% or even higher, the interest will be higher, and it will, therefore, mean your minimum required payment will be higher, the amount you pay in interest will be higher, and it will take even longer to pay off your principal.

What Happens if You Miss a Payment?

Several things are possible:

  • You will be charged late fees and penalties plus interest.
  • The interest rate the card company charges may increase because having missed a payment you may be considered a bad risk.
  • Your credit utilization ratio will change. This ratio is the amount of debt you have compared to the amount of credit you have. So if you owe $5000  and your credit limits are $8000, the n you have a score of 62.5%. If you miss payments and your debt increases, then your score goes down. A lower score makes it more difficult to get new credit. That may not matter today, but it may matter if you want to make the most of Black Friday or other major sales periods to buy some new expensive items for the home or seasonal gifts.

If you do not make up the missed payment within 30 days or if you keep missing payments::

  • Your credit score may be reduced because the card company may report the failure to the major credit bureaus.
  • You may find it is a barrier if you want to take out new credit with a store or dealership in the future. If you can get the credit, you may have to pay higher interest rates.

Bottom Line

Credit is a powerful resource. Today’s society depends on it in international trade, commercial transactions, and in ordinary domestic life. But it can become a problem. If it becomes a problem, you are not on your own. We at DebtBlue are experienced in helping people to understand credit card problems and to work out how best to solve them. So, if you have missed minimum payments, need advice on how to reduce your debt burden, or ant to let us create a plan of action for you, then please get in touch by clicking here and leaving your contact details so one of our specialists can begin work.