Two credit card issuers can look at the same balance, at the same interest rate, and ask for different minimum payments. Neither is doing anything irregular. They are using different formulas, and the difference is not small: on the same debt it can change the payoff date by years and the interest by thousands.
What follows is both formulas, worked through on one balance, so the difference is visible.
The two shapes
Almost every US issuer uses one of two calculations.
Percentage plus interest. A small percentage of the principal, typically 1%, plus the interest and any fees charged that month. Sometimes written as “1% of the balance plus interest and late fees”.
Flat percentage. A larger percentage of the whole balance, typically between 2% and 4%, with interest already inside that figure rather than added to it.
Both are then subject to a floor, usually somewhere between 25 and 35 dollars, so that small balances still clear in a reasonable time rather than dwindling by pennies. When the calculated minimum falls below the floor, you pay the floor. When the remaining balance is below the floor, you pay the balance.
The same debt, both ways
Take a balance of $5,000 at 22.9% APR, paying only the minimum, and assume nothing new is charged to the card.
The monthly rate is the APR divided by twelve:
22.9 / 100 / 12 = 0.0190833… (1.90833% a month)
Month one interest is therefore:
5,000.00 × 0.0190833 = $95.42
Under 1% plus interest, the first minimum is:
1% of 5,000.00 = $50.00
plus the interest = $95.42
-------
$145.42
Of that $145.42, exactly $50.00 reduces what you owe. The rest is the cost of carrying the balance for a month.
Under a flat 2%, the first minimum is:
2% of 5,000.00 = $100.00
The interest of $95.42 is taken out of that $100.00, so $4.58 reduces the balance. The payment is lower, and the progress is very much lower: the flat-percentage minimum puts about a tenth as much against the principal in the first month.
That gap is the whole point. The flat percentage asks you for less money and leaves you in debt far longer, and a statement showing only the figure due gives you no way to tell which of these two situations you are in.
Why the payment keeps shrinking
Both formulas are proportional to the current balance, so as the balance falls the required payment falls with it. A reader who pays exactly the minimum every month is paying a smaller amount each time, which means the portion attacking the principal shrinks every month even though nothing about the rate has changed.
This is the mechanism behind the long payoff times. It is not that the minimum is small once. It is that the minimum is designed to stay proportional to a balance it is barely reducing.
When a minimum does not cover the interest
Under percentage-plus-interest, the minimum covers that month’s interest by construction, because the interest is a term in the formula. The balance always falls, however slowly.
Under a flat percentage, that guarantee does not exist. The minimum covers the interest only while the interest is less than the percentage. At 2% of the balance, the monthly interest exceeds the payment whenever the monthly rate goes above 2%, which is an APR above roughly 24%. Above that line the balance grows every month while the payment is made in full and on time.
Our minimum payment calculator refuses to produce a payoff date in that case and says why, because a number measured in centuries is not an answer.
What the law requires an issuer to tell you
The Credit CARD Act of 2009 added the minimum payment warning that appears on US statements. It must show what paying only the minimum will cost in time and total money, and what monthly payment would clear the balance in three years. The disclosure rules sit in Regulation Z, 12 CFR 1026, and the Consumer Financial Protection Bureau publishes plain-language answers about credit cards.
What the law does not require is that the issuer tell you which formula produced the figure. That is in your cardholder agreement, and reading it is the only way to know which of the two situations above describes your account.
What this site assumes, and why it says so
Our calculators default to 1% of the balance plus that month’s interest, with a $35 floor, and they say so next to the result. We also model the flat percentage, because it is the shape that produces the never-clears case and because it is what the most widely deployed calculator software uses.
If your agreement says something different, change the figure and the calculator will follow it.
That agreement is worth finding for its own sake. The section is usually headed “minimum payment” or “how we calculate your minimum payment”, it runs to a paragraph or two, and it is the only document that tells you which of the two situations above you are actually in.
Questions
- Which minimum payment formula does my card use?
- Your cardholder agreement says, usually in a section headed "minimum payment" or "how we calculate your minimum payment". It is the one document that answers it for your account, and the figure printed on your statement should reconcile with whichever formula it describes. The two shapes in common use are a flat percentage of the balance, and a smaller percentage plus that month's interest and fees. Both normally carry a floor of around 25 to 35 dollars.
- Why does the minimum payment fall every month?
- Because both formulas are a percentage of the current balance, and the balance is falling. That is what makes paying only the minimum so slow. Each payment is smaller than the one before, so the amount attacking the principal shrinks every month even though the interest rate has not moved.
- Is paying the minimum ever the same as paying nothing?
- Not quite, but it can be close. Under a percentage-plus-interest formula the payment always covers that month's interest by construction, so the balance always falls. Under a flat percentage formula it is arithmetically possible for the minimum to be less than the interest at a high enough rate, and then the balance grows despite the payment being made on time.
- What is the box on my statement that mentions three years?
- That is the minimum payment warning required by the Credit CARD Act of 2009. It states what paying only the minimum costs you in time and money, and what you would need to pay each month to clear the balance in three years. It is one of the few places an issuer is required to show you the slow path priced in full.