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Understanding how credit card minimum payments are set

Issuers vary in how they calculate minimums

By Analisa Nazareno

Editor's note: See our 2012 survey of card issuers minimum payments, " Survey: Minimum payments haven't changed, but we have "

For consumers, a credit card minimum-payment-due amount can be a mysteriously shifting figure that can make a significant impact on the monthly budget.

The most mutable variable in the credit card minimum payments calculation -- the interest rate -- can rise or fall for many reasons, including whether a customer consistently just pays the minimum each month. What many may not know, however, is that while credit card companies set their own calculations for minimum payments. they are required to do so in a way that allows consumers to pay a portion of the principal, so they can eventually climb out of debt -- assuming they don't keep putting on new debt on their balance.

"They should know that if they choose to make the minimum payment, they are paying down on that loan," says Kevin Mukri, spokesman for the Office of the Comptroller of the Currency, which regulates national banks. "So that should give them some kind of comfort. That debt is not going to get bigger. It's not going to stay the same. That loan amount is going to get paid off. And of course, the more you pay off, the quicker it's going to get paid off."

During an economic downturn, the minimum payment requirement becomes consequential for many more consumers. Typically 4 percent to 5 percent of credit cardholders each month pay just the minimum, according to the American Bankers Association. The organization is expecting this percentage to grow as the economy continues to suffer from layoffs, company consolidations and bankruptcies.

How minimum payments are calculated

Below is a sampling of minimum-payment-calculation policies for the nation's largest credit card issuers:

Chase -- Greater of the following:
  • 2 percent of the balance
  • 1 percent plus all interest and any fees

Bank of America -- 1 percent of the new balance, plus finance charges and late fees, if applicable

Citi -- Past fees and financing charges due, plus any amount in excess of credit line, plus the greater of the following:

  • The new balance on the billing statement, if it is less than $20
  • $20 if the new balance is at least $20
  • 1 percent of the new balance plus finance charges and any applicable late fees
  • 1.5 percent of the new balance

American Express -- Varies, including 2 percent of the balance on some cards

Capital One -- The full balance, if less than $25, or if more than $25, then 1 percent of balance plus: the current statement's finance charges, if applicable; past due fees, if applicable. If the account is delinquent, the minimum payment will include any past due amount.

Discover -- 2 percent of the balance or a minimum or $15 plus any finance charges or fees

Wells Fargo -- $15; or the entire balance on the account if the new balance is less than $15; or 1 percent of the new balance shown on the

billing statement, plus the sum of the fees and finance charges, plus 1 percent of the new balance shown on the billing statement

USAA -- Full balance when balance is $15 or less, or 1 percent of the account balance, plus fees or finance charges, but not less than $15

  • 1 percent of the balance, plus finance charges and fees, such as late fees and over-limit fees
  • A minimum of $10

"In this kind of an economy, we expect delinquencies to be up, and we expect people to be paying the minimums because people are losing their jobs," says Nessa Feddis, vice president and senior counsel for the ABA. "In any economic downturn, we would expect that just as a natural consequence."

Lower minimum payments, deeper debt

When it comes to minimum payments, however, things have changed for the better since the last economic downturn. In 2003, federal regulators responded to an outcry over decreasing minimum payments that, in effect, kept cardholders in debt indefinitely by allowing balances to grow through interest accrual -- a phenomenon called negative amortization.

Negative amortization occurs when your monthly minimum payment is less than the amount of interest charged to your account in a month, meaning that those who only pay minimum balances will never pay off their balances. Here's how it works:

  • Say your credit card statement balance is $3,000 and your minimum payment due is $20.
  • You submit your minimum payment on time and make no new charges on the card.
  • During the next billing cycle, the amount of interest accrued on the card balance is $95. (Note: This number is merely used as an example and not meant to reflect any specific APR.)
  • Your next credit card statement balance would then be $3,075, with a minimum payment due of $20.
  • You submit your minimum payment on time and make no new charges on the card .
  • During the next billing cycle, the amount of interest accrued on the card balance is $100.
  • Your next credit card statement balance would then be $3,155, with a minimum payment due of $20, and the cycle continues.

This was just part of the problem, however. "It wasn't just negative amortization, but the lowering of minimum payments to the point that it took a very, very long time for consumers to pay off the debt that they owed," says Travis Plunkett, legislative director for the Consumer Federation of America, one of the consumer groups that lobbied federal regulators to change their guidance on minimum payments.

"The issuers did this because it was profitable," Plunkett says. "It allowed them to extend the amount of debt that people owed and to earn more interest income, and because they knew borrowers were more likely to focus on lower minimums and were more likely to pay less."

The government steps in

Federal regulators -- the OCC, the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision -- responded to the criticism in 2003 by setting a standard, requiring minimum payments that "will amortize the current balance over a reasonable period of time."

Category: Bank

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