Credit Card Minimum Monthly Payments: Paying More Saves Money

Recently, the new credit card minimum monthly payment guidelines set forth by the Office of the Comptroller of Currency came into effect. The original directive was given in January 2003, and gave banks and credit card companies three years to come into compliance. As of January 2006, the changes were in effect throughout the nation. This has had a significant effect on many of those who have credit card debt. However, there are strategies that can be used to mitigate the effects of the credit card minimum monthly payment policy change.

What Does "Minimum Payment" Mean?

The minimum payment is the smallest amount you can pay on your outstanding credit card balance without incurring a late fee or missed payment fee. Your card issuer calculates your minimum payment each month. Your minimum payment may be as little as 2 to 3 percent of your outstanding balance, while a 21 percent annual interest rate costs you 1.75 percent per month. Do the math: You’ll see that a 2 percent minimum payment barely reduces your outstanding balance and that a 3 percent minimum payment is only slightly better. At this rate, it can take years to pay off even a small balance. If you continue to make purchases with the card, you’ll find yourself with a steadily increasing balance, even though you’re making your minimum payment faithfully. If you really want to make a dent in your balance, you must make payments larger than the required minimum.

Note: Your credit card company or bank is required to provide the following on you monthly billing statement: 1) The number of months and the total cost (including principal and interest) of repaying the current balance if you only make the "required" minimum monthly payment; and 2) the amount you should pay each month in order to pay off the current balance within the next 36 months.

If you have a credit card that is charging you varying interest rates on different portions (e.g., cash advances or balance transfers) of the total balance, credit card companies are required to allocate payments exceeding the minimum payment to the portion of the balance with the highest interest rate first.

Example: The following chart shows what happens if you pay just the minimum (assuming a 2% APR). In our example, we have used the average American household credit card debt in 2014, which is approximately $15,250. We also allow for an additional $100 a month in spending, which is very conservative. With time, the debt continues to increase and you make absolutely no headway in paying it down. The only way to make a dent in the balance is to make significantly larger payments. You can see the results for yourself, and experiment with various balances, APRs, and minimums using our calculator at the top of this page.

example: paying off $15,250 in credit card debt making just the minimum

How do you pay off your credit balance?

As mentioned above, you might never get your balance paid off by making only the required minimum payment each month. Even though the amount you owe may seem impossible to pay, there are strategies to help you reduce the balance. These strategies include simply paying more than the required minimum each month, using a lump-sum windfall to pay off your debt, prioritizing repayment, doing a balance transfer, and using an interest reduction strategy. The following are some steps that the average credit card holder can take to ease the difficulties brought on by these changes.

1. First, if facing both the mandated increase in the credit card monthly minimum payments and a raised interest rate, try to address the interest rate increase. Many have had success in simply calling the credit card company or the bank, via the telephone number on the back of the credit card, and asking for a reduction of the interest rate. A surprising number of banks and credit card companies have been willing to make compromises, as they realize that can mean the difference between a borrower paying the debt or defaulting.

2. The next step that those holding credit card debt can do is try to reduce their monthly expenditures by an amount equal to the increase of the credit card minimum monthly payment. At first glance, it may seem much more difficult than it really is. There are a variety of little things that can be done, ranging from grocery shopping on the way home from work, rather than spending the gas money on a separate trip, to taking a lunch from home a few times a week to avoid spending the extra money, to using a library card to borrow movies from the library, instead of renting them.

3. Shaving the household budget here and there can make up the difference, or at least a good portion of it, in many cases. For those with a financial situation that is a bit more complex, there are other options. These include professional credit counseling, debt consolidation or taking a lower interest home equity loan to pay off the higher interest credit card debt.

4. While there are many who have been negatively affected by the new credit card minimum monthly payment rules with thought and planning the new financial strains can be managed. The important thing is, if the increased credit card minimum monthly payment is causing fiscal hardship, not to let the situation get out of control without taking action to resolve it.

5. Whenever possible, pay more than the minimum. Do your best to create and adhere to a budget, and always try to live within your means.