Credit card terminology can be complicated and all the more so when it comes to critical issues like how much you need to pay towards your bill. With complicated fees, interest and various charges, it can be tough to understand how the credit card company calculates the amount you have to pay on your statement.
The minimum payment on a credit card is the minimum amount you have to pay per month to stay within your terms and conditions. The minimum payment in the UK is usually 1% of your balance plus all fees and interest although some might be higher.
To help you understand exactly how the minimum payment is calculated and what it means, here is our detailed guide.
Why credit cards have minimum payments
The minimum payment is a way for the credit card company to ensure that all customers who borrow money using their credit card make repayments towards their debt every month.
Without setting a minimum payment, some customers may never repay the debt causing both, the customer and the credit card company problems.
Originally, minimum repayments were higher - as early credit cards worked like charge cards do today, you had to repay the entire balance on your credit card every single month. This meant that customers did not really borrow money using a credit card - it was simply a more convenient way of making payments.
Over time, this has changed and today the minimum payment is only a small proportion of the overall credit card balance. While you can pay any amount you like, the payment will only count as acceptable, if it is equal to or more than the minimum payment on your statement.
What is the lowest possible minimum payment?
In the UK, the regulatory minimum for the minimum payment on a credit card is equal to 1% of your outstanding balance plus all incurred fees and interest charges.
Let's use an example to show you what this means.
Let's take a credit card with a balance of £1,000 and an interest rate of 16.9% (for simplicity, let's use one interest rate here). Let's assume that the customer was also charged a £3 fee for a transaction made abroad and £10 for doing a balance transfer.
In this case, the minimum payment will be calculated as follows. First the 1% of balance adds up to £10. Next add the fees - that's another £13. Then work out the monthly simple interest rate and multiply by the £1,000 (again assuming the entire balance was held for the entire month for simplicity!) 16.9% annual interest rate is about 1.310% per month which comes out at £13.10.
So the total minimum payment in this example will be £10 + £13 + £13.10 = £36.10.
Remember that there is always a clause in the minimum payment that says "subject to a minimum of". This applies in cases where the balance is very low and the minimum payment would come out as a very low number.
If you use the same case as above, but remove the fees and change the balance to £100, the minimum payment calculation would be £1 + £1.31 = £2.31. Almost all credit card companies have a minimum level of £5, £10 or £25 for their minimum payments so in this case, the calculation would set the monthly payment at the fixed amount. The only case where this does not apply is when your balance is less than the fixed amount in which case the minimum payment will equal your balance.
Why are some minimum payments higher?
The majority of credit card companies use the lowest possible minimum payment calculation. Barclaycard, MBNA, RBS, HSBC, Santander, Virgin Money and most other credit card companies will use the simple 1% plus fees and interest calculation. Some of these (for example MBNA, RBS and Virgin Money) will have a minimum level set at £25 while Barclaycard, Santander and HSBC have the minimum set to just £5.
Some companies - for example Capital One and American Express have a higher minimum payment on their credit cards. They have the same basic calculation, but add 3% and 2% of the total balance respectively. Barclaycard used to have much higher minimum payments, but that has changed in recent years.
Higher minimum payments are more often found on premium credit cards. Customers on those cards often repay their cards in full anyway and the credit card company makes a decent amount on the transaction interchange fees they charge the retailers.
Because American Express is both a credit card company and a card scheme (like Visa and Mastercard), they have slightly different rules applied to them which means they can charge retailers a lot more for processing the transaction. As a result, encouraging customers to spend by increasing the minimum payment is a good strategy.
Lastly, in some cases increasing the minimum payment is a way for credit card companies to make products profitable. In the case of very long balance transfers on promotional 0% interest rates, some companies will set higher minimum payment levels.
With a higher minimum payment, the cost of lending the money to the customer is lower and the customer repays their 0% interest more quickly which means they are more likely to go and spend on the card building a new balance which does charge interest.
The minimum payment calculation
The majority of credit card companies use the same basic calculation that we've outlined above - 1% (or sometimes higher) of your total balance plus fees and interest is the amount you have to pay.
But as with many things about credit cards, not everything is quite as simple as that.
The first item that is sometimes added is the monthly insurance cost. While a lot of banks have had to pay out huge amounts in the PPI scandal, it is surprisingly becoming more common for them to offer new types of insurance on credit cards. The monthly cost of this insurance is either flat or dependent on the balance and will be added to the minimum payment calculation.
Another important point in the calculation is that interest charges are calculated daily and not monthly. This is where it can get pretty complicated.
If you make a purchase on a credit card that does not have a balance, you will not be charged any interest on that purchase in the following statement. If you go on to make a full repayment, that transaction will never incur any interest.
If you do not repay in full, then a complicated calculation will be done on the following statement. The whole amount of the transaction will incur interest for the whole month between the date when the transaction was made and the date on which the partial payment came in. Then the difference between the transaction amount and the payment will incur interest from the payment date until the next payment date.
Here is where it gets even more complicated. Even if you repay in full the second time round, the next statement after that will still charge you interest even though you have no balance! This will be for the time between the second statement being generated and the date on which you made the payment when there was still a balance on the credit card.
One rule here is that if you do not clear your balance in full, then all transactions begin being charged interest the day you make them. The interest-free time period only applies to cases where your balance is repaid in full every month.
What happens to the minimum payment if you miss a payment?
When your credit card statement is generated, you will have a fixed period of time in which to make the minimum payment. This period depends on the type of card you use and the system setup the credit card company uses - it ranges from 2 weeks to 25 days or thereabouts - depends on the number of days in a month.
If you don't make a payment during this window, your account will become delinquent. This means that in the eyes of the credit card company, you have defaulted on your payments. It doesn't matter if you've made a payment if it is less than the minimum payment amount - it will be applied to your balance, but will not count as you making your monthly payment.
But all is not lost if you forget or are unable to pay. The first thing that will happen is you will be charged a late payment fee - this is £12 across the board for UK credit card providers. If you then make a payment before the next statement is generated (roughly between 5 days and 2 weeks depending on the time you originally had to make the payment), then everything will revert back to normal.
In this case your next statement will still calculate the normal minimum payment. The only difference is if you used to pay the credit card in full - your next statement (and the one after, partially) will also begin charging interest because your balance was not repaid in full the previous month.
Otherwise, you should be alright and if the timing is lucky, you may find the credit card company does not report this late payment to the credit reference agency because you never went one full payment behind (which only happens on statement date).
If, however, you miss a payment and let the next statement be generated, your minimum payment will simply go up to the sum of two minimum payment calculations. The amount owed on the first bill will be added to the new minimum payment which will include the £12 late payment fee and any applicable interest.
In most cases, that means your minimum payment will be a fair amount more than twice the original one you missed and about 3 times the amount on an average credit card in total.
How to make the minimum payment
Making the minimum payment on your credit card is easy. You just need to make sure a payment arrives between the statement date and the payment due date at your car provider.
You will normally have a few different ways of making a payment - through the provider's website/app, transfer from your bank account, direct debit or rarely used options like giro slips and cheques.
The key thing to remember is that it is when the money arrives that counts, not when you have actually sent the payment. If you log onto the credit card provider's website on the payment due date and make a payment, you will still miss the deadline and be charged a late payment fee because these payments typically only arrive the following business day.
Things like giro slips and cheques can take several days to clear - there's really no good reason to use these at all.
To make sure, especially if you're paying close to the due date, transfer the money from your bank account. The credit card company will give you bank account details and the reference number you should use (often your credit card number). These payments are typically credited within minutes or even seconds.
Better still, set up a direct debit. If you can't repay the full balance, set up a direct debit for the minimum payment to make sure you never miss it. Then you can always make manual payments for anything above the minimum depending on your financial situation.
Can the minimum payment change?
The minimum payment calculation will normally be fixed for the life of your credit card account. It is very rare for it to change and it normally only changes when there are new regulatory reasons that force the companies to do so.
However, sometimes your minimum payment may increase without you realising and here are a few common reasons why it may do so.
- If your credit card company increases your interest rate, the minimum payment will increase because the fees and charges element will now be higher. Keep this in mind when deciding whether to accept or reject the increase (or in cases where you have no choice such as a base rate linked increase).
- Obvious as it may be, every time your balance increases, so does the minimum payment. Make sure you can make the repayment before spending on the card.
- New regulations mean that credit card companies have to do something if customers pay off less balance than interest and fees over an 18-month period. While we haven't seen this really happen just yet, it is likely to mean that your minimum payment may have to increase if you continue to only make the minimum payment for a long period of time.
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