How Credit Card Minimum Payments Work

The common minimum payment formulas

Look in your card agreement for a section titled something like “How we calculate your minimum payment.” Most formulas fall into one of two families, plus a floor.

Interest plus 1% of the balance

The minimum covers that month’s interest and fees, plus 1% of the balance. A PNC Bank agreement filed in the CFPB’s credit card agreement database is a typical example. Its minimum is the largest of three amounts:

• $25
• 2.5% of the new balance
• 1% of the new balance, plus the interest and most fees on the statement

Past-due amounts are added on top, and a balance under $25 must be paid in full.

This design traces back to 2003, when federal bank regulators told card lenders they expected minimum payments that “amortize the current balance over a reasonable period of time.” Their guidance criticized formulas where the minimum doesn’t even cover the month’s interest and fees, so the balance keeps growing. A minimum that includes all the interest plus a slice of principal always pays the balance down, at least a little.

A flat percent of the balance

Other issuers take a set percent of the statement balance. A Navy Federal Credit Union agreement, for example, sets the minimum at the greater of 2% of the new balance or $20. If the balance is under $20, you pay the balance.

Some issuers use a higher percent. The higher the percent, the faster the balance falls.

How the three example rules compare

Our calculators include three presets: interest plus 1% ($25 floor), 2% of the balance ($25 floor) and 3% of the balance ($25 floor). Percent minimums are computed on the balance after that month’s interest, and a balance under the floor is paid in full. Here is the first minimum payment on a $5,000 balance at 24% APR under each:

What the CARD Act makes your statement show

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) added repayment disclosures to every card statement. The rule is in Regulation Z § 1026.7(b)(12). Each statement must include:

• A bold “Minimum Payment Warning” saying that if you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.
• How long it would take to pay off the current balance paying only the minimum. Under 2 years, it’s shown in months. Otherwise it’s shown in years, rounded to the nearest whole year.
• The total cost of paying only the minimum.
• The monthly payment needed to pay off the balance in 36 months, the total cost at that payment, and the savings compared with paying the minimum.
• A toll-free number for information about credit counseling.

The 36-month lines can be left off in some cases, such as when paying only the minimum already clears the balance in 3 years or less.

How issuers calculate those numbers

Appendix M1 of Regulation Z sets the method. The estimate assumes you pay only the minimum each month and make no new purchases. Issuers use the APRs that apply to each part of the balance, including a promo rate until it expires. They may assume every month is the same length and use either a monthly or a daily periodic rate.

The estimate counts as accurate if it’s within 2 months of the actual payoff time. So if your statement’s number is a month or two away from our calculator’s, both can be right.

For a sense of the 36-month figure: paying off $5,000 at 24% APR in 36 months takes $196.16 a month and costs $2,061.97 in interest.

The minimum payment trap, in numbers

The trap is simple. Each month the balance falls a little, so next month’s minimum is a little smaller, so the balance falls a little less. The payment shrinks right along with the debt, and the last few hundred dollars take the longest.

Here is the same $5,000 at 24% APR, paid five ways, with no new charges:

The 2% row is the trap at its worst. At 24% APR the monthly rate is 2%, so a 2% minimum barely covers the month’s interest. The balance shrinks by a sliver each month, and our calculator, which stops at 100 years, never reaches a payoff. A 2% minimum at a typical card APR is close to an interest-only payment.

Now look at the fixed rows. Those payments never shrink, so every month the same dollars go to work, and more of them reach principal as the interest falls. The formula matters less than whether your payment falls with the balance.

How to get out of the minimum payment cycle

• Pick a fixed payment and keep it. Use the first minimum on your statement as the floor, not the target. The credit card payment calculator finds the payment for a payoff date you choose.
• Use the 36-month line on your statement as a ready-made goal. It’s the payment that clears today’s balance in three years if you stop using the card.
• Stop new charges on the card you’re paying down. The statement estimates assume no new purchases. New ones push the date back.
• Know where extra money goes. Anything above the minimum must go to your highest-APR balance first (§ 1026.53).

The credit card payoff calculator shows a fixed payment month by month. For the bigger picture across several cards, see how to pay off credit card debt and how credit card interest works.

What happens if you miss the minimum

A missed minimum usually brings a late fee. If you fall more than 60 days behind, Regulation Z lets the issuer apply a penalty APR to your existing balance. The issuer must stop charging it after six consecutive on-time minimum payments (§ 1026.55(b)(4)).

The due date rules protect you a little. Statements must arrive at least 21 days before the due date, and an issuer can’t treat a payment as late if it arrives within 21 days of the statement being mailed or delivered (§ 1026.5(b)(2)(ii)).

FAQ

How is a credit card minimum payment calculated?

Your card agreement sets the formula. A common one is the month’s interest and fees plus 1% of the balance, with a floor such as $25. Others use a flat 2% or more of the balance with a floor. Past-due amounts are added on top, and small balances under the floor are due in full.

What is the minimum payment on a $5,000 credit card?

It depends on the issuer’s formula and your APR. At 24% APR, interest plus 1% gives a first minimum of $151.00, a 2% rule gives $102.00, and a 3% rule gives $153.00. Each one then shrinks as the balance falls.

What happens if I only pay the minimum on my credit card?

The balance falls slowly because the payment falls with it. On $5,000 at 24% APR, an interest-plus-1% minimum takes 19 years, 3 months and costs $8,723.33 in interest, assuming no new charges. A fixed $250 payment takes 2 years, 2 months instead.

Is the payoff estimate on my statement accurate?

It’s close. Regulation Z Appendix M1 lets issuers assume equal-length months and a monthly or daily rate, and counts the estimate as accurate within 2 months. It also assumes you make no new purchases and pay only the minimum. Any new spending or a rate change makes the real timeline longer.

Why did my minimum payment go up?

With an interest-plus-1% formula, a higher balance, a higher APR or new fees all raise the minimum, because each month’s interest and fees are part of it. A past-due amount is added in full. A penalty APR after a payment more than 60 days late also raises the interest portion.

Does paying more than the minimum reduce interest right away?

Yes. Interest is charged on the balance, so any payment above the minimum lowers next month’s interest. On a card with several APRs, federal rules make the issuer apply the extra to the highest-rate balance first. Paying earlier in the billing cycle also lowers the average daily balance.