Ask an expert: Credit card minimum payments

This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author's alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.

A: Each credit card issuer uses a slightly different formula, but, as a result of new federal guidelines, most credit card companies now require you pay at least 4 percent per month.

Until recently, the typical minimum monthly payment was about 2 percent of your outstanding balance, or about $20 for each $1,000. This would cover the interest due but would make only a tiny dent in the principal. If you paid only the minimum required amount each month, it would have taken decades to pay off even a moderate balance, and the long-term interest charges would have been extremely high.

In 2005, federal regulators encouraged credit card issuers to raise their monthly payment requirements as part of a strategy to reduce the number of bankruptcies. The idea was that consumers would be obliged to pay their debts down faster, before they spiraled out of control. As a result, most of the major credit card companies now require a minimum payment of about 4 percent per month, or double the previous average.

While some cardholders may find these larger payments harder to meet, the long-term savings can be enormous. Let’s assume your card has an interest rate of 18 percent and a balance of $5,000, and that you’ll never make another purchase on the card. With a 2 percent monthly payment (which initially would be about $100, falling eventually to a minimum of $10), it would take a little over 46 years to pay off, and you’d shell out over $13,000 in interest! But if you paid 4 percent of the balance each month (initially about $200), you would retire the same debt in just over 12 years, paying less than $3,000 in interest.

If you have a large credit card balance and feel unable to manage the new minimum monthly payments, you may want to consider a debt consolidation loan. This type of loan usually carries a much lower interest rate than a credit card, and your lender may be able to work out a payment schedule that is more realistic for you.

Dan Moore
Vice President, Product Management

 

Find The Right Credit Card.