Credit card minimum monthly payment

Question

I am opening a new credit card and am not sure exactly what this clause means:

Your Minimum Payment Each Month.

Each billing cycle, you must pay at least the Minimum Payment Due shown on your monthly statement by its Payment Due Date. We will calculate it as follows:

(1) If the Principal Balance (defined below) is less than $15, the Minimum Payment Due equals the Statement Balance shown on your monthly statement.

(2) If the Principal Balance is $15 or more, the Minimum Payment Due equals the greater of $15 or the total of:

• 1% of the Principal Balance,
• Any interest charges billed on the monthly statement (excluding any interest charges that accrued during prior billing cycles on a deferred interest balance that ended during the billing cycle covered by the statement),
• Any Minimum Interest Charge,
• Any Returned Payment Fee, and
• Any Late Payment Fee.

The “Principal Balance” equals the Statement Balance on your monthly statement minus any interest charges, Minimum Interest Charge, Returned Payment Fee, and Late Payment Fee that is incurred during the current billing cycle.

If we so elect, your Minimum Payment Due may also include any amount that, at the time of billing, is past due and/or over your credit line.

In certain instances your Minimum Payment Due may be less than the total fees and interest assessed that billing cycle. At any time you may pay more than the Minimum Payment Due up to the full amount you owe us. However, you cannot “pay ahead”. This means that if you pay more than the required Minimum Payment Due in any billing cycle or if you make more than one payment in a billing cycle, you will still need to pay the next month’s required Minimum Payment Due by your next Payment Due Date.

In my naive understanding of how credit cards work I would expect my actual bank account to be charged the how much I spent in the billing period. The two cases confuse me a bit and any clarification would be appreciated.

For what it’s worth, I don’t really plan on buying more on credit than I can repay at the end of billing period.

Answer 1

In my naive understanding of how credit cards work I would expect my actual bank account to be charged the how much I spent in the billing period.

You should then set-up to pay the Full Due Amount; else you will incur charges and interest. Generally if you don't pay in FULL; the card requires to pay at least the Minimum.

If the Principal Balance (defined below) is less than $15, the Minimum Payment Due equals the Statement Balance shown on your monthly statement.

If you swipe for say $5 or say $10 total in a month; you will have to pay in FULL. i.e. the Minimum Payment is FULL amount due.

If the Principal Balance is $15 or more, the Minimum Payment Due equals the greater of $15 or the total of: • 1% of the Principal Balance, • Any interest charges billed on the monthly statement

Scenario 1:
If you swipe say for a total of $200 in a month; the minimum due is 1% of 200; that is $2. However the minimum by default is $15. So you have to pay $15 and the balance $185 will incur interest and you can pay it off in the next cycle.

There are more elaborate rules to calculate the minimum if you are carrying the balance. Say you paid $15 first month, next month the minimum would be 1% of 185; 1.85. Plus interest on 185 for a month; say 3%. Around $5.55. If there is any late penalty fee, etc. If this is less that $15; you pay 15, if more than $15 you pay the actual amount.

Scenario 2:
If you swipe say for $2000; then 1% of $2000 would be $20. So the minimum would be $20.

Answer 2

Credit cards don't require you to pay your balance in full every month. In fact, they would actually prefer that you don't -- they make most of their revenue from interest payments. However, they do want to encourage you to pay eventually; if you just keep charging without ever paying, they lose money (you'll also have a lousy credit score, so there are other disincentives for you to do this, but that's outside their control).

If you don't pay your balance in full by the due date, future bills will incur interest fees for the unpaid balance.

But if you pay less than the minimum payment, you will get charged an additional late fee (which can be much larger than the interest) and there can be other penalties, such as interest on future purchases starting on the purchase date rather than on the due date of the bill.

So you can avoid all fees by paying your bill in full each month, and avoid extra penalties by paying at least the minimum required payment.

If you keep paying your full balance, you'll likely find them increasing your credit limit periodically. They're hoping that this will entice you to charge more and overextend yourself, so you'll have to pay interest. Try not to fall for this trick!

Answer 3

Credit cards do are not generally linked to a bank account. You may be thinking of a debit account, in which your purchases are paid for directly from a bank account.

Answer 4

(I know this answer is correct for the UK, I am 99% sure it is also correct for the USA, in other parts of the world YMMV).

In my naive understanding of how credit cards work I would expect my actual bank account to be charged the how much I spent in the billing period.

Normally, by default your bank account is not automatically charged anything. It is up to you to pay at least the minimum payment on your bill by the due date. If you don't then penalties will accrue and your credit rating will get dinged*.

With many cards it is possible to set up automatic payments, but this is an optional feature and the choice of whether to have automatic payments and if-so how much is automatically paid is a separate decision from applying for the card in the first place. Typically the card issuer will offer a choice of automatically paying either the minimum payment, a fixed user-specified amount or the full balance.

Minimum payment rules are set up so that if you pay the minimum, you will pay your balance off very slowly and pay lots of interest to the credit card company. They do want you to pay off the bulk of your balance eventually but they have little incentive for you to do it quickly.

What makes minimum payments particularly insidious is that the payment is defined in terms of your current balance, not what you initially borrowed. So each month your minimum payment drops. With the rules you have posted (and assuming you have a balance large enough that the $15 rule doesn't kick in) if you make the minimum payment each month it will take nearly 6 years for your outstanding balance to drop to half it's original value.

Eventually if you keep making the minimum payment and don't charge any new purchases, your balance will drop low enough that the $15 floor on the minimum payment kicks in and some time after that you will eventually pay off the loan, but it can easily take decades to reach that point.

* Eventually of course if you don't pay they will resort to more forceful means to collect the debt, obviously court action is one way, here in the UK if your bank and credit card company are the same they also have the option of "setting off" your debt with them against your credit balance with them. Such mechanisms are beyond the scope of this answer which assumes you will honour your agreement and pay at least the minimum payment on time.