Based on Is rent considered a debt?
The question of:
What is your total monthly debt payment (e.g. student loans, vehicles, credit cards, personal loans, etc.)?
got me thinking.
If you rack up $500 every month and pay it off in full but have the option to just pay the minimum (let's say $25) then which monthly debt payment should you calculate?
You asked,
then which monthly debt payment should you calculate?
I think the only legitimate answer to this question is, "it depends" (on the context). Why are you doing this calculation and what else is involved?
Generally, in a financial sense, debt means money a borrower owes a lender - it's a deferred payment, usually including interest, for some value (usually money, i.e. a loan) that the lender has already provided the borrower. So, in the strictest technical sense of the definition, every dollar that goes through the credit card is "debt." However, if you're asking about debt in a specific context, the answer may vary slightly.
But that doesn't automatically mean that all the money you owe, or all money you spend, is debt. In your example, if you're asking from a personal budgetary perspective, if you're "racking up" $500 every month on a credit card and always immediately paying it back, in the grand scheme, you're essentially just pumping regular expenses through a very short term loan. It's probably even an interest-free loan if you're paying it back quickly enough. From a budgeting perspective, many people would not consider that debt, but would account for that monthly $500 as an operating expense - with the differentiating factor being that "debt" means "things you're paying interest on" - which is an important differentiation from a personal budgeting perspective, since most people doing budgeting have a goal of paying as little interest as possible. So, defining debt as "things I'm paying interest on" helps filter out the white noise of using a credit card as an interest-free tool for deferring payment on regular expenses from cases where you're incurring true debt that you'll have to pay interest for.
Meanwhile, from a credit reporting perspective, the thing that matters is what your credit card issuer reports to the credit bureaus each month - which will be the balance on the card on that day, and whatever your minimum payment is. Depending on the rhythm of when you rack up that $500 balance through the month, when you pay it back, when your statement is generated, and when the bank reports to the bureaus, the balance reported may or may not actually represent that total $500 amount - it will likely be less than that.
Finally, from a debt load calculation perspective - i.e. a new lender trying to determine your DTI as part of you applying for a new loan - the thing that matters is the minimum required payment that was reported on your most recent credit report. In your scenario, a lender trying to determine your eligibility for a new loan would consider your monthly debt load to be $25.
So, depending on the context, you may get a slightly different answer to your question.
which monthly debt payment should you calculate?
Since you are treating the CC as "slightly deferred spending" instead of "borrowing", I would not consider that as a debt payment.
(Note that I payoff my CC at end of month, not on the due date, because it's paying current spending. This simplifies my budget.)
"Monthly debt" is a contradiction in terms.
Living expenses is the right word for new expenses that crop up every month, like the cable bill.
Debt is the total amount you owe, and it is not time-related; it's not a rate, so it can't be "monthly". Paying that large amount would instantly end the debt.
"Monthly debt payments" is not a correct term for living expenses you place on a card and pay off in full every month. It may be tehnically debt, but it doesn't work like debt; it works like living expenses because it wouldn't really affect your financial picture if you just paid cash. When a financial advisor asks about monthly debt payments, they don't mean this. And you shouldn't conceal expenses from an advisor by charging them to a card and then calling them "debt". You should report "$40 dinner out, $20 movie tickets" as living expenses (and then, don't double-report them again as a $60 debt paydown. They're only an outlay once, make sense?)
Businesses call this a "short term payable" and treat it differently than long term debt. It's viewed almost like check float, back when checks were mailed and interchanged on paper.
"Monthly debt payments" are the periodic payments you make to settle long-term debt in installments. They have two parts:
Generally when dealing with lightweight consumer finance analysis, they are mostly interested in your cash flow. So all they care about is the "monthly payment", which includes principal and interest.
If they are doing a more sophisticated analysis, as in a P/L and Balance Sheet, they care about the difference between interest and principal, because interest is a true expense (money gone byebye), and principal is ... Weird.
If you want to get into the gory details of that, the "living expense" of a credit purchase occurs on the date you buy the meal, movie ticket, whatever. The unpaid CC bill becomes debt, and when you move $500 from savings to credit card payoff, that's considerd a wash - you have $500 less savings but also have $500 less debt, so these cancel out! The income statement shows numbers canceling, the P/L doesn't even show it. The only place it's important is on the Cash Flow statement.
I can understand the spirit of the other answers that are drawing a distinction between money that's accruing interest and money that's not. You swipe your card, your bank pays the merchant $25, the merchant gives you lunch, you owe your bank $25. That's a $25 debt. If your bank gives you a generous grace period before charging interest, that's fine, but you have a debt of $25 to the bank. By any reasonable definition of the word debt, that's a debt.
If this is an effort you're making to arrange your own budgeting to prioritize your own debt repayments to minimize your interest expenses, then sure you can take some liberties about which debts to prioritize. But money you owe someone else is debt even if the lender isn't yet charging you interest on your debt. Money owed is debt.
And yes, in accounting there are differences between long term and short term debts and short term portions due of long term debt. But the common thread in all of that is the fact that it's a debt. Credit card debt within the grace period and not yet accruing interest charges and debt accruing interest charges are both debt.
When you go seek more debt underwriters will ask for information surrounding your existing debt and your income. Generally, housing is separate from consumer debt like credit cards and car loans. The underwriter wants to know your minimum required payments to understand your ongoing obligations compared to your income. So your credit card debt maintenance is the monthly interest charge plus 1% of principal thanks to the CARD act. Different underwriters will have different criteria, but the goal is to understand your ability to absorb another obligation.
This is not the same as the rent question. And I disagree to the answers to some extent as to whether or not rent is a debt because it would depend on the lease agreement. When you rent something you are agreeing to pay for the use of a thing for a period of time; failure to pay would be a breach of contract. In the case of a credit card, the bank lent you $25 to buy lunch.
It sounds like really the only reason you're finding the question posed
What is your total monthly debt payment (e.g. student loans, vehicles, credit cards, personal loans, etc.)?
confusing is revealed in the phrasing of this question's title,
Would the minimum payment or full CC amount be considered monthly debt?
The financial assessment is not asking for a "total of payments relating to monthly debt". It is asking for a monthly total of payments relating to debt. "Monthly debt" on its own doesn't accurately describe a specific quantity you should be seeking to estimate.
If a debt you currently have has no monthly costs because it will be settled within less than a month, you can straightforwardly omit that from your total of monthly debt payments. It would not help give a clearer view of your finances to do otherwise.
When you are asked that question (for example by a potential lender), they want you to use the minimum credit card payment amount.
For example:
How to Calculate Debt-to-Income Ratio (DTI Ratio):
Credit card payments (use the minimum monthly payment amounts not what you actually pay)
How to Calculate Your Debt-to-Income Ratio (and What It Means):
... minimum credit card payment...
The assessment is trying to get a picture of your cash flow, broken down into different categories. For this purpose, the actual amount that you're paying is what's relevant. The fact that the credit card company will accept less without penalizing you (except for interest) doesn't really matter, in my opinion.
However, there's a possibility that this could cause the same expenses to be counted twice. If the assessment also asks your food budget, and you usually pay for groceries using a credit card, they'll show up twice. If any of the expenses in other questions are normally paid by credit card, you should probably subtract them from this response.
However, if the assesssment is just getting the big picture of your finances, it's likely that these small amounts won't make much difference. Credit card debt doesn't usually become an issue unless you let balances accrue and it builds up to thousands of dollars, with interest also mounting up.
In no case, though, is just the minimum payment a useful answer to the question, unless that's all you're paying.
Anything you pay off as soon as it's due is not debt.
For example, if the full amount is due within 30 days -- or your rent is due within 3 days of the first of the month, it's not debt if you pay it within those deadlines. Whatever balance you do not pay in the time allowed for full payment is debt, including future installments on any purchase not paid by the full payment date.
Your monthly debt payment is the monthly total of all payments described in the previous sentence. Presumably, you are going to continue to pay the minimum due each month, and this takes away from "spendable funds" in the present.
All of which ignores any debts which might be paid off soon (which would decrease the total monthly burden) or any new installment purchases (which would increase it). But the assumption is that if you do want to take any new debt later, the credit department there would want fresh figures, and make their determination based on those.
And this is a little bit off the topic, but it deserves to be said again and again: if you are buying real estate, and you also want to buy furniture and such on credit, wait for closing first, then buy the furniture. You don't want your mortgage company to pull another credit report and say, "your credit was fine then, but now you have more debt and you no longer qualify for a mortgage".
