A survey of the minimum payment requirements of major credit card issuers shows they’re no longer raising minimum dollar-amount payments, but consumers should still pay as much as they can each month.
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The survey found the nation’s biggest card issuers have agreed on a single formula for charging minimum payments, after tinkering with the minimum dollar amount they would accept between 2012 and 2014. Of the 10 credit card issuers surveyed in March 2017, two set $15 as the minimum dollar amount payment; five charge $25; one charges $30; and two charge $35. (See table: Minimum payment policies of major credit card issuers.)
Since 2014, Synchrony has raised its minimum dollar amount to $25 from $10 – and was the only issuer in this survey to raise its minimum payment amount.
The formulas used to calculate minimum payments have been largely unchanged in the past five years. After being criticized by federal regulators in 2003 for setting minimum payment formulas at levels so low they kept consumers in near-perpetual debt, most of the card issuers have settled on a basic billing formula, with one payment method for very small balances and another for higher balances.
What’s the most typical formula for minimum payments?
The most-typical formula for higher balances calls for consumers to pay 1 percent of the total balance, plus the monthly interest charge and any fees. Once consumers whittle down their debt to nearly nothing, then minimum dollar payments may kick in. With a few minor variations, the “1 percent plus interest method” is used by 9 of the top 10 U.S. credit card issuers. The exception: Discover, which charges 2 percent of the balance.
Although a higher minimum payment may lighten your wallet today, it’s a good deal down the road.
“Higher minimum payments are better for consumers, because they pay down the debt faster and cost less in interest accrued,” says Chi Chi Wu, staff attorney for the National Consumer Law Center. “We always urge consumers to pay more of the minimum whenever they can.”
Minimum payments have become a standard feature on credit card bills, since getting a more prominent display. Among the significant changes brought about by the Credit CARD Act of 2009 was a requirement for issuers to include a minimum payment warning box on credit card statements. That box must show how long it would take to pay off the card’s balance by making only the minimum payments, and how much you’d need to pay each month to clear the balance in 36 months.
A January 2012 survey showed a few card issuers raised minimum payments to either a set dollar amount, or a percentage of the full balance due, plus the monthly interest – whichever was greater.
A June 2014 survey showed most percentage calculations for minimum payments remained the same while a few dollar amount minimums changed. A March 2017 review found only minor tweaks to policy language and only one dollar amount change from Synchrony, as previously noted.
What banks require, how they’re different
No specific set of regulations details how minimum payments should be set. Each company can set its own model, and some companies set various minimums for the different cards they issue. But the models are similar: They require a small percentage of the outstanding balance, plus fees and interest.
For many card issuers, if the balance on the card is below a certain dollar amount, the full balance is due.
Some companies’ calculations are more complex. Try saying these all in one breath:
American Express sets its minimum payment as the greater of interest charged on the statement plus 1 percent of the new balance (excluding any over-limit amount, penalty fees and interest on the statement); or $35. Then the company adds any penalty fees shown on the statement, 1/24th of any over-limit amount, rounds to the nearest dollar and adds any amount past due.
Wells Fargo also has a complicated formula. The minimum payment due is the greater of $15 (or the entire balance if the new balance is less than $15); or the sum of the fees and interest accrued during the billing cycle for which the minimum payment is calculated, plus 1 percent of the new balance shown on the billing statement. The minimum payment is then rounded up to the next highest dollar amount.
Chase made a significant change between 2012 to 2014, raising its minimum from $10 to $25, where it remains in 2017. With Chase, the minimum payment due is the larger of $25 (or total amount owed if less than $25), or the sum of 1 percent of the full balance, the periodic interest charges and late fees billed on the statement for which the minimum is calculated. Five years ago, the minimum payment was the larger of $10, 2 percent of the balance, or 1 percent of the balance plus all interest and any fees.
Reality of minimum credit card payments
Dennis Campbell, an associate professor at Harvard University, worked as part of a team that studied the impact of the CARD Act. The study results, released in February 2011, showed the new information had a positive impact on cardholders paying more than the minimum.
“A large fraction of consumers did key in on the 36-month number,” he said. “We saw a spike in customers paying around that amount when the disclosures came.”
Prior to the CARD Act, fewer than 2 percent paid the amount required to pay off the debt in three years, Campbell said. “It spiked up to 8 percent or so after the CARD Act.”
Campbell’s group looked at data from Affinity Plus Federal Credit Union’s 132,000 members, which had a credit card portfolio of 30,000 members.
Unfortunately, more recent data shows that consumers aren’t paying as much as they could each month, despite the clear, 36-month payoff disclosures.
A 2016 study conducted by the National Bureau of Economic Research found 29 percent of consumers regularly make payments at or near the minimum payment due, but many aren’t paying the recommended amount needed to pay off their debt in 36 months.
The bureau calculated that the CARD Act disclosures have saved consumers $62 million in interest costs each year, but that number could’ve passed $2 billion if all consumers paid the suggested payment amount, rather than just the minimum due.
Payments are applied differently, too
The CARD Act also changed how payments are applied by banks when consumers have balances that carry more than one interest rate. Before the act, the common practice in the industry was to apply payments to the debt with the lowest interest rate. The act requires at least some of the higher-priced debt to be repaid first.
For example, if you had a balance with a 0-percent introductory interest rate and a balance from a cash advance at a 20-percent interest rate, the act requires the credit card company to apply your payments to the higher rate debt before it reduces the balance on the lower rate debt.
Minimum payment policies of major credit card issuers
|Bank name||Minimum payment policy||Min. payment for a $1,000 card balance with a 15% APR||Min. payment for a $500 card balance with a 25% APR|
|American Express||The greater of:|
Then, AmEx adds any penalty fees that are on the statement and 1/24th of any over-limit amount (rounded to the nearest dollar), plus any past due amount.
|Bank of America||The greater of:||$30||$25|
|Capital One||The greater of:||$30||$25|
|Chase||The greater of:||$30||$25|
|Citi||The greater of:|
In all cases, add past fees and finance charges due, plus any amount in excess of credit line.
|Discover||The greater of:||$35||$35|
|Synchrony||The greater of:||$30||$25|
|USAA||The greater of:||$23||$15|
|U.S. Bank||The greater of:||$30||$30|
|Wells Fargo||The greater of:||$23||$15|
|Source: CreditCards.com research, April 2017. Assumes no late fees or other fees.|
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