Credit Card Minimum Payment Calculations Explained
Your minimum credit card payment is a small amount of your total balance. We explain how it is calculated.
When you borrow using a credit card, you have to pay back some of your debt each month. You can choose how much you repay: you could clear your entire balance and avoid interest charges, or you can just pay off part of your debt.
However, you must pay back something — otherwise you’ll damage your credit rating, incur penalty charges and potentially lose any promotions you have on your credit card, such as an interest rate. The amount that you must repay each month is known as the minimum payment.
How much is the minimum payment on a credit card?
The minimum payment on your credit card is usually a small amount. That might sound appealing to you as the borrower, but it is important to note that it is in the interest of your credit card provider to keep it low. If you only make the minimum repayments, you are in debt for longer and pay more money in interest.
The minimum payment you must make each month is usually a percentage of your outstanding balance. For example, if it is 4% of your balance and you owe £1,000, your minimum payment would be £40.
Only making the minimum repayment will cost you, though. If you only made the minimum repayment on that £1,000 debt, and you had a 19.9% APR interest rate on your credit card, it would take more than nine years to pay it off. During that time you would also pay more than £500 in interest.
How is a credit card minimum payment calculated?
The law states that the minimum payment on your credit card must be at least 1% of the balance plus your interest for that month, any default charges and your credit card fee if it has one.
Some credit card firms also have a floor that your minimum payment can’t fall below. For example, it may be that your minimum payment cannot be less than £5 a month.
So, the minimum payment on your card may be listed as three different things. For example, the greatest of 2% of your balance plus interest, 4.5% of your balance or £5.
What does the credit card minimum payment cover?
Your minimum repayment covers the interest on your debt for that month as a bare minimum. That means as long as you meet your credit card’s minimum repayment your balance will fall, as long as you don’t use the card that month.
Where to find the minimum payment on your credit card
When you get your monthly credit card statement it should show what you’ve spent on the card that month, what your balance is, what the minimum repayment is and when you have to pay it to avoid late fees.
Should I pay more than the minimum payment?
If you can afford to, you should try to repay more than the minimum payment. There are several reasons for this. Let’s use an example to help explain them.
Julie owes £2,000 on her credit card. The interest rate is 19.9% APR. The minimum repayment on her credit card is the higher of 2% or £5. She has stopped using the credit card and now wants to focus on clearing the debt.
- Clear your debts faster. If Julie only made the minimum repayment on her credit card, it would take her 42 years and one month to clear her debt.
- Pay less interest. Over those 42 years, Julie would pay £5,488 in interest.
- Avoid your repayment shrinking each month. One reason it would take Julie so long to clear her debt is that her minimum repayment is a percentage of her debt. As her debt shrinks, the amount she repays will also gradually shrink each month. For example, the first month Julie's minimum repayment will be £40. But when her balance has fallen to £1,000 her minimum repayment will have dropped to £20.
If Julie opted to repay a set £50 a month then she would clear her debt 37 years faster and shave over £4,000 off the interest she paid.
What if I can’t afford the minimum payment?
If you can’t afford to make the minimum payment on your credit card, you need to speak to your lender. They may be able to help by arranging a temporary repayment solution.
If you don’t tell them, you’ll end up paying a late fee and it will be marked as a missed payment on your credit report, which can damage your credit score.
» MORE: What’s a good credit score?
Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more