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Why Minimum Payment on a Credit Card Costs You So Much

NEW YORK ( -- If you carry a balance on your credit card from one month to the next, it is important to understand what goes into calculating your minimum monthly payment. The more you know about your minimum payment, the faster you may be able to pay down your balance.

The minimum payment is the smallest amount of your balance you can pay by the due date and still meet the terms of your card agreement. The minimum payment due is often a percentage of the balance, typically 1% to 2%.

Keep in mind that the minimum payment due is not the same as your account balance. The majority of the minimum payment goes to interest, and very little of it pays off the actual loan. If you assume the minimum payment due is all you need to pay each month, you will end up owing far more in interest charges than you budgeted. The account balance is your total account debt as of the last statement date.

Paying more than the minimum can save thousands
You may be paying only your minimum payment because that is all you can afford. But by adding just $10 a month to your minimum payment, you may be able to save thousands of dollars in interest and pay off your debt years earlier.

Here is an example illustrating this. Assume you have a credit card balance of $1,500 and an APR of 18%.

By paying just the minimum payment due each month:
Total Minimum payment:
Initially $37 per month
Time it will take to get rid of debt: 160 months
Total interest charge during payback period: $1,792.52

By paying $10 more than the total minimum due:
Monthly payment:
$47 (initial $37 due plus $10 extra)
Time it will take to get rid of debt: 44 months
Total interest charge during payback period: $555.70

By paying $10 more than the total minimum payment, but still making that fixed payment until the debt is paid off, you will save $1,236.76 in interest payments and pay off your debt 116 months faster -- almost 10 years earlier.

Minimum payment formulas
There isn't a specific set of regulations detailing how minimum payments should be set, so each credit card company has its own formula. Most issuers require a small percentage of the outstanding balance, plus fees and interest, to be paid. For many companies, if the balance on the card is $15 or less, the full balance is due.
  • American Express (AXP - Get Report) Amex has one of the more complex formulas. The minimum payment starts with the highest of interest charged on the statement plus 1% of the new balance (excluding any overlimit amount, penalty fees and interest charged on the statement), or $35. Then it adds any penalty fees charged on the statement and 1/24th of any overlimit amount, rounded to the nearest whole dollar. After that, the company adds any amount past due. Your minimum payment due will not exceed your new balance.
  • Bank of America (BAC - Get Report) The minimum payment for a Bank of America credit card is 1% of your current balance, plus interest charges and any late fees for the month.
  • Capital One (COF - Get Report) If your balance is less than $25, your minimum payment will equal your balance. Otherwise, your minimum payment will be greater of $25 or 1% of your balance plus interest and late payment fees.
  • Chase (JPM - Get Report) Your minimum payment will ordinarily be the larger of $10 (or total amount you owe if less than $10) or 2% of the new balance; or the sum of 1% of the new balance, the periodic interest charges and late fees they have billed you on the statement for which your minimum payment is calculated.
  • Citi (C - Get Report) The minimum payment due is 2% of the outstanding balance or $30, whichever is higher.
  • Discover (DFS - Get Report) The minimum payment due will be the greater of $35 or 2% of the new balance shown on your billing statement, or any interest charges and late fee shown on your billing statement plus $20.

Applying the minimum payment to balance with the Lowest APR
Credit card issuers generally apply the first part of your payment, the minimum payment due, to that portion of your balance with the lowest APR. This is one way credit card issuers keep you paying the higher interest rates longer. But the 2009 CARD Act mandates that any amount paid over the minimum payment due is first applied to the balance with the highest APR.

The CARD Act also requires issuers to include an information box on monthly credit card statements showing how long it would take to pay off the balance by making only the minimum payment and what your interest penalties would be if you paid off the balance in 36 months. A recent survey by Consumer Action showed that 45% of consumers surveyed said they pay more every month because of the minimum payment warning on their monthly statements, while 26% said the warning has had no impact on their payment behavior.
Bill Hardekopf is chief executive of, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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