Ask an expert: Credit card minimum payments

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


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