What is the minimum monthly repayment on a credit card?

credit card payment

"How do I know what the minimum amount I have to pay for my credit card every month is?"

Any credit card that carries a balance requires the holder to pay at least some of the money owed back each month.

This is what's known as the minimum monthly repayment.

1%, plus interest and charges

In January 2011, the Government changed the rules and set out a minimum amount that credit card providers must expect back from cardholders each month.

The minimum repayment amount is now by law at least 1% of the outstanding balance, plus any interest and charges added to the account that month.

Some credit cards will require more than this (and poor credit deals for example, are very likely to), but it will never be less.

Because of the way the minimum repayment is now worked out it varies considerably depending on whether the cardholder has an introductory 0% period or is paying a standard rate of interest.

To work out what the minimum amount due it's worth checking the card's terms, you can also ask the credit card provider to just pay the minimum off when setting up a monthly direct debit.

But.

Never just pay the minimum

Only paying the minimum amount due is a bad idea for almost any credit cardholder.

Here's an example of what happens, based on the legal minimum:

Interest rate Balance: £2,000 Balance: £5,000
17.9% p.a.
~1.385% monthly
£47.70
(interest: £27.70
+ reduction: £20)
£119.25
(interest: £69.25
+ reduction: £50)
0% offer
(excluding any transfer fee)
£20
(reduction only)
£50
(reduction only)

As you can see from the above, while the balance would have reduced to some extent, cardholders coming off 0% periods with outstanding balances will see a sudden increase in minimum repayments.

Previously, minimum payments used to be set at around 2% - 3% of the outstanding balance and there was no separation between incurred charges and having to reduce the amount owed.

While this meant minimum payments had less effect when interest was being continually added to an account - to a debt dangerous point (which was why the law was changed) - 0% offers now suffer from a similar problem.

During periods of 0%, the minimum repayment now only has to clear 1% of the total amount each month, which means cardholders with large balances coming off 0% rates see a considerable increase in the amount they have to pay back.

This of course simply heightens the need for cardholders using 0% periods to really budget repayments and try and clear as much as possible before the promotional rate ends.

Low balance minimums

As balances reduce the minimum actual amount eventually kicks in - this is the smallest amount required to be paid back or the balance cleared in full.

For example, when a balance gets as low as £25 the credit card provider may expect the full amount to be cleared rather than continuing with ever diminishing percentages.

How payments are applied

When a credit card balance isn't cleared in full, providers set out an order in which payments made to the account will be applied to different transactions.

With all the recent regulation changes in the credit card market - repayment order wasn't overlooked.

This used to be a notorious loophole in which credit card providers could charge high rates of interest on certain transactions, while only applying payments made to the account to those balances incurring less interest.

Now though credit card providers must apply payments to the highest rate balances first, and while they've still unsurprisingly found loopholes in this, generally speaking payments will now clear the most expensive debt first.

This does mean however, where a credit card account has a higher rate balance on it - over paying to clear the more expensive transaction can help to reduce the amount being paid.

Seriously: pay more than the minimum

While the law was changed to help reduce credit card debts from never being repaid, minimum payments are still a path to dangerous debt and only paying the minimum can mean even small balances take years to clear.

As part of the new regulations, people who frequently only make the minimum repayment may find that their card company contacts them to advise them of the overall costs that this will entail.

In some cases, they may provide contact details for free debt advice.

Only paying the minimum also results in paying much more interest due to the balance being owed over a much longer period.

Options for repayment

To assist with paying off debt cardholders facing higher repayments could also consider shifting their debts on to a card with a better long term borrowing deal.

Shop around for the best balance transfer deals (see our 0% guide). Just be aware that once the 0% deal ends, the interest rate will be fairly high.

Starting off with a credit card that offers a low rate on transferred balances (see this article) may be another option that could help to avoid returning to standard interest rates.

Not making the minimum

Not making at least the minimum required payment each month is considered a default on the account.

If this happens, default charges (commonly set at £12 per default) would be added to the account and the default would be recorded on a credit report.

As such, missing a payment or not paying as much as is required can affect ability to get credit in the future.

We've covered further information on checking and repairing a credit rating in this article.

For people struggling to meet the minimum, speaking with a not for profit debt advice agency can help to alleviate the burden and find solutions for dealing with the problem.

There are a lot of free advice services and many ways to get in touch with them. Find out more in our debt advice guide here.

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