Did you know your minimum credit card payment is rising? A new government program working to get Americans out of credit card debt is pushing credit card issuers to raise minimum monthly payments. Will you be able to make the higher monthly payment? Here are some tips for getting by.
by Joel Walsh
If you’re an American, your minimum monthly credit card payment may soon be doubling. If you’re only paying the minimums now, you’ll have to be careful to adjust your budgeting to pay more.
Who’s Raising Your Monthly Minimum Credit Card Payment?
- Whose idea was it to increase credit card minimum monthly payments? The Office of the Comptroller of the Currency, a bureau of the U.S. Treasury Department that has become more and more involved with reigning in the abuses of credit card companies. Yes, this credit card minimum payment increase was thought up by people trying to help you.
- Who will be raising their monthly minimums? So far, some of the largest credit card issuers have agreed to the new standards. Bank of America has already been asking for the higher monthly minimum payment. MBNA, Citigroup (a.k.a. Citbank), Discover, and Chase (on some of its cards) will be breaking the news to their cardholders as Fall 2005 progresses.
How Much Will Credit Card Minimums Increase?
For many credit cards, such as MBNA and Bank of America, the new rates mean that monthly minimum payments will double.
- Right now, the monthly minimum payment is only 2% of the balance on most of these cards. The new rate will be around 4% (the actual number may vary from card issuer to card issuer). This means that if you have the average American credit card balance of about $10,000, your minimum monthly payment will go from $200/month to $400/month.
- Of course, if you have any additional fees, whether a late fee or a cash advance fee or any of the other fees that the credit card guys cook up, you will have to pay that, too.
How Minimum Payments Are Calculated
It’s worth knowing exactly how your credit card company comes up with that minimum payment. The calculation varies, but typically works one of two ways:
- A set percentage of your outstanding balance (historically 2%, now jumping to around 4%).
- A percentage of your balance plus any new interest and fees you’ve racked up.
Most issuers also have a base minimum—usually $20 to $35. If your percentage calculation comes out lower than this base, you’ll pay the base amount instead. And if your balance is less than the base, your minimum will simply be the amount you owe.
Other factors that can impact your minimum:
- If you’re over your credit limit, any amount over may be rolled into your minimum payment.
- Missed payments can also get tacked on.
- If you’ve signed up for special installment or payment plans (like Citi Flex Loan, American Express’ Pay It Plan It®, or Chase’s My Chase Plan), the required payments for those plans may be added on top of your minimum.
Every issuer’s formula is different, so be sure to check your cardmember agreement for the specifics. The common thread: if you’re carrying a balance, you’ll need to budget for a larger minimum payment—plus any extra charges that sneak in.
What Happens If You Miss a Payment or Go Over Your Limit?
Now, if you’re wondering what happens when things slip—a missed payment here, a little overspending there—brace yourself, because it isn’t pretty.
- Missed a payment? Most card issuers will tack last month’s missed minimum onto what you owe this month. Keep letting payments slide, and the minimum keeps growing, digging the hole deeper every time.
- Spent past your credit limit? Many companies will roll whatever you’ve charged over your limit right into your new minimum payment. Meaning: not only do you owe the original minimum, you also have to pay for the extra spending spree.
- Signed up for a card installment plan? If you’re paying off a balance in set installments—like with Citibank’s Flex Loan, American Express’ Pay It Plan It®, or Chase’s My Chase Plan—the monthly installment may also be bundled into your minimum. That’s on top of your regular minimum payment.
In short: Every missed due date, every dollar over your credit limit, and every special payment arrangement can all add up—fast—making an already rising minimum payment climb even higher.
How Installment Plans Affect Your Minimum Payment
Wondering if signing up for those streamlined installment plans—like Citi Flex Loan, American Express’ Pay It Plan It®, or Chase’s My Chase Plan—changes what you owe each month? Here’s what to keep in mind:
When you take on an installment plan through your credit card company, the monthly payment from that deal usually gets tacked onto your regular minimum payment. In other words, your required minimum each month will include both your standard percentage of the balance and the fixed payment owed on the plan.
And if you’re over your credit limit or have missed previous payments, those amounts may also be rolled into your new, higher minimum. Always review your statements closely so you’re prepared—surprises on the payment due date aren’t nearly as fun as those mystery bonus points.
Why the Credit Card Minimum Payment Increase?
You may be wondering why anyone would want to make you pay a higher minimum monthly payment. The basic reason for making you pay more is: for your own good.
According to Mike Peterson, co-founder of American Credit Foundation, by doubling the amount you pay per month toward credit card debt, you will cut down on what you pay toward interest by much more. Look:
- Old monthly minimum payment of 2% of balance, $2,000 credit card debt at 18% percent interest:
- Time to pay off debt in full: about 30 years.
- Interest paid: about $5,000–two and a half times what you initially borrowed!
- New monthly minimum payment of 4% of balance, same debt:
- Time to pay off debt in full: about 10 years. Time saved vs. old payment: 20 years.
- Interest paid: about $1,100–slightly more than half what you originally borrowed. Amount saved vs. old payment: $3,900.
Tips for Paying Double Easily
According to Michael Peterson of the American Credit Foundation, even tiny savings really add up when it comes to debt. His favorite example is the Diet Coke example:
Bigger Savings
- Taxes. Most Americans could pay hundreds of dollars less tax each year if they just took all the deductions they were eligible for upfront, rather than waiting to get a refund in April. By April, you will have spent a big chunk of money on interest on debt that you wouldn’t have spent if you’d had the money at hand.
- Call the credit card companies and ask if they can allow you to set up a payment plan, or at least provide a brief extension. Simply calling and letting them know you haven’t forgotten about them can help keep you out of the worst trouble.
- Credit counseling. Credit counselors can talk with credit card issuers to help you get a repayment plan you can keep up with. They can also open your eyes to untapped sources of income you never knew you had, like kicking the $1,000,000 Diet Coke habit.
If you find yourself only able to make the minimum payment on your card, don’t panic. While it’s true that paying just the minimum will drag out your debt repayment, there are times—like an emergency or a cash-flow crunch—when making the minimum is the best you can do. In those moments, focus on priorities: make sure you cover the essentials first, like groceries, utilities, and keeping a roof over your head. Meeting at least the minimum payment is still important, as it preserves your access to credit and keeps your account in good standing while you regroup.
Remember, these steps aren’t permanent solutions, but they can help you avoid falling further behind while you work toward bigger changes.
In short, don’t panic if you are worried about your credit card payment rising. With only a little bit of planning, you can make the higher minimum monthly payment work to your advantage, just as the policy’s authors intended.
About the author: Joel Walsh has written more articles on credit card debt counseling: