Understanding minimum credit card payments and practical tips for effective debt management

Ah, behold the credit card statement, an essential companion in our monthly financial journey! It acts as a mirror, reflecting the choices we’ve made, both practical and indulgent during the last statement period. It’s natural to first observe the balance while reviewing your statement, but you might also notice a much smaller number directly below – the minimum payment.

Before you decide to meet only that minimum obligation, you should consider your financial goals, which may open your eyes to the benefits of paying down more. Let’s start with the basics and unravel the mystery of the credit card minimum payment.

What is a credit card minimum payment?

The minimum payment is the smallest amount you can pay towards your credit card statement balance, by the payment due date, without incurring penalties. Think of it like the "I've met the minimum requirement” payment. By paying it, your account will remain in good standing, and you won’t be charged a late fee.

But, how is this minimum payment calculated? Well, it depends on the issuer of your credit card. Some may calculate it as a flat rate, like a set dollar amount that you need to pay. Others may base it on a percentage of your balance, meaning the payment will vary depending on how much you owe. And guess what? Some issuers even use a combo of both these methods.

At the very least, you should try to aim for the minimum payment. It's the baseline you should strive to pay to keep your financials on track. If you can pay more, that's even better! The ultimate goal, though, is to pay your whole statement in full. No lingering balance, no worries.

How are minimum payments calculated?

Each financial institution (ie. card issuer) may calculate the minimum payment differently, but two approaches are the most popular. The minimum payment could be calculated as a fixed amount (typically $10) or a percentage of the balance (2% - 5%), whichever is greater.

If you owe $2,000, for instance and your issuer uses the percentage method, a 3% minimum payment would be $60, plus any late fees and accrued interest.

Let's take a look at how BMO calculates minimum payments as an example.

BMO calculates the minimum payment very clearly. If you live outside Quebec, your minimum payment will be $10.00, plus any interest and fees (except for installment plan interest and fees). But here's the kicker: if you have any overdue amount or if your total balance exceeds your credit limit, the higher amount of the two gets added too.

Now, if you're in Quebec, it's a tad different due to provincial regulations. As of August 1, 2019, the province of Quebec requires that the minimum payment in your credit card statement is never less than 5% of your balance owing. It's their way of encouraging you to steadily chip away at your debt.

In the case of BMO, for those in Quebec, your minimum payment will be the larger of three things:

• 5% of your balance due, and any overdue amount on your account statement
• The amount your total balance exceeds your credit limit
• A minimum of $10 if none of the other options apply

It may sound a bit complicated, but it's important to understand how these factors affect your credit card payments.

The difference between minimum payments, statement balances, and current balances

Now that we understand what a minimum payment is, let’s look at how it differs from two other important numbers: the statement balance and the current balance. In a nutshell: the statement balance is what you owe at the end of a billing cycle, while the current balance is what you owe currently.

The statement balance - found on your monthly statement – represents the combined total of your purchases, interest charges, fees and any unpaid balances in a given billing cycle. When you pay the statement balance in full and on time, you won’t owe any interest on purchases made in that billing cycle.

Think of the current balance as the up-to-date sum of what you owe on your credit card. So, if you decide to purchase that sweater after your statement balance was calculated, the cost of the sweater will show on your current balance.

When you pay the current balance, you're not only covering the statement balance, but you're also taking care of any additional purchases that were made since the last billing cycle. It's like hitting the refresh button, and your balance goes down to zero.

Some other important definitions to keep in mind when going through your credit card statement are the due date and the end date of the billing cycle.

The due date is the deadline for your payment to avoid any late fees or penalties, whereas the end date of the billing cycle is the last day of the period that your credit card statement covers.

Knowing these dates can make managing your finances smoother. So, watch out for them on your statement to pay on time, and keep track of your spending. Now, let's explore what happens if you only pay the minimum.

What if I only make the minimum payment?

Here’s the thing: Interest accrues on any amount remaining on your credit card and on any new purchases after the payment due date if you do not pay your balance in full. So, while making only the minimum payment is okay, it can hurt your financial health in the long run.

Why? Well, those interest charges can grow over time which will take longer to pay down. While the minimum payment is okay for short-term breathing room, it's important to aim higher whenever possible.

For example, say you owe $2,500 on a credit card with a 20.99% interest rate. If your minimum payment is set at 2% of your balance, you would pay $50 per month to maintain good standing. But it would take you close to 63 years, and cost approximately $17,140, to pay down the debt (including $14,644 in interest).¹