On every credit card statement, you will see a minimum payment. While this may not seem like much compared to your overall debt, this amount could be encouraging you to spread your repayments over a longer period and costing you more interest in the long run.
What is a minimum payment and how is it calculated?
A credit card minimum payment is exactly what it sounds like – a minimum payment you must make on your credit card bill by a certain date.
Your bank or provider will work out this payment sum based on your overall account debt and your card’s interest rate.
At the end of each billing cycle, your bank or provider will send you a bill featuring all your recent transactions. Your statement will include the total amount you owe on your credit card, total transactions made during the billing cycle and your minimum payment for that billing cycle.
Banks and credit card providers set different monthly minimum repayments, which can usually be found in your “summary box”. Under UK rules, any credit cards taken out since April 2011 must set a monthly minimum payment of at least 1% of your balance. The table below serves as an example of how a card provider calculates its minimum payment.
How can I pay the minimum payment?
You usually have 2 options to pay off your credit card bill every billing cycle.
- Direct debit. You can set up a direct debit with your bank where you can specify that you’d like to automatically pay the full balance, a fixed amount or just the minimum payment every month. By setting up a direct debit, you’ll guarantee you will never miss a payment and won’t have to worry about penalty fees or damage to your credit record.
- Manual payments. You can decide how much you want to pay every month – whether it’s the minimum payment, the full balance or somewhere in between. You can pay your credit card company via standing order or bank transfer. This method gives you greater control over how much you are paying, but you’re more at risk of missing payments so you need to make sure you can keep track of the payment deadline.
Should I pay the minimum payment or a larger amount?
It all depends on what you can afford. At the very least, you should make the minimum payment. However, by continuing to pay only the minimum payment, you will take longer to pay off your debt and are likely to incur higher interest fees.
To avoid paying unnecessary interest, it’s a good idea to pay your entire balance or something in between the minimum payment and your total debt.
As your outstanding debt reduces with every payment, so does the minimum payment required on every new statement. This means small balances on credit cards could take a long time to repay if you continued to make the minimum payments.
Example: Tom has a £4,000 credit card debt
Admin assistant Tom has run up a £4,000 credit card debt but can only afford the monthly minimum payments of £65.
If Tom continues to pay off his debt at 18.9% APR with the £65 monthly payments, it could take him 13 years to pay it off. Aside from paying back his debt amount of £4,000, he would end up spending a further £6,121 on interest.
A friend suggested he consider a balance transfer card, giving him a promotional 0% interest rate for 24 months, with a one-off fee of 1.4%. Under this offer, Tom could continue to make the monthly minimum payments of £65, but the interest break means he could pay a lot less overall and pay off his debt faster. The balance transfer offer means he could pay off his debt in 6 years and 7 months and only end up spending a further £1,169 on fees and interest. By transferring his debt to a 0% balance transfer offer, Tom would save £4,952.
* This is a fictional, but realistic, example.
Different types of credit cards explained
How does minimum payment work with 0% offers?
Some credit cards offer 0% interest on purchases and/or balance transfers for an introductory period, which usually ranges from 12-36 months. Although it means you get a break from interest, it does not mean you get a break from making monthly minimum payments.
It’s important to note that making your minimum monthly payment won’t necessarily clear your total debt within your interest-free period.
Instead, you should calculate exactly how much you need to pay each month to repay the entire balance by the time the interest-free period ends. Find your monthly repayment by dividing the size of your debt by the number of months in the balance transfer offer.
The table below shows what percentage you should pay off each month to fully clear your debt during the interest-free balance transfer promotional period. We’ve also shown how much this would be for a £2,000 debt. For this example, we’re assuming no new purchases are being made with the card.
| Duration | % of total to repay each month to clear debt | What that would equal per month on a £2,000 debt |
|---|
| 6 months | 16.67% | £333.33 |
| 9 months | 11.11% | £222.22 |
| 12 months | 8.33% | £166.66 |
| 14 months | 7.14% | £142.85 |
| 16 months | 6.25% | £125.00 |
| 18 months | 5.56% | £111.11 |
| 20 months | 5.00% | £100.00 |
| 24 months | 4.17% | £83.33 |
If you miss a payment, you could incur penalty fees and could also have the 0% offer withdrawn or the time reduced.
What happens if I miss a minimum payment?
If you forget to pay or can’t afford to pay your minimum payment, you will incur fees and this could impact your credit report. This, in turn, could affect your ability to attain credit in the future.
If you accidentally missed the payment date, make a payment immediately. However, if you’re struggling to pay, contact your provider as soon as possible as it may be able to help.
You could also risk having your interest rate increased or perhaps the introductory 0% period on your card shortened or withdrawn altogether.
All you need to know about debt
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Source: Finder survey by Censuswide of Brits, December 2023
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terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
