Have you ever looked at how the minimum monthly payment on your credit card is calculated? Most people haven’t. But how your credit card calculates the minimum payment—in particular the "floor"—is really important if you tend to pay only the minimum payment each month.
What is the Floor of the Minimum Monthly Payment?
The minimum monthly payment will never fall below the floor^. Most credit cards impose a floor of only £5 but some credit card providers (e.g., Tesco Bank) have raised this to £25. At first glance, a smaller floor may seem better—it’s not. The smaller the floor, the longer it will take to pay back credit card debt and the more interest you will pay along the way.
The following chart compares the total interest paid over time for a £5 floor and a £25 floor, on a £1,000 initial balance where only the minimum payment is made each month. In this case, the higher floor saves the cardholder £770 in interest charges over the life of the debt.
When Does the Floor Kick In?
As a cardholder works to pay down debt, the typical minimum payment declines over time. This is because the minimum payment is generally calculated as a percentage of the balance. As the balance drops so do the minimum payments—until the floor is reached.
How is the Minimum Monthly Payment Calculated?
Typically, a minimum monthly payment is calculated as the highest of:
- £5 (or the full outstanding balance if it's less than £5) – the "floor"
- 2.5% of the balance
- 1% of the balance plus interest and default charges
For a credit card charging 18.9% APR, a £25 floor would kick in for all balances below £1,000 or so. This means that each month the minimum payment would be a fixed £25—it would not drop below £25 as you work to pay down the balance from £1,000 to zero.
A card with a lower floor of £5 would take much longer to pay off, because the minimum payment would continue to decline until the balance falls to around £200, at which point the £5 floor kicks in.
|Floor||Floor Kicks in for Balances Below…||Time to Pay Debt||Total Interest Charges|
|£5||£215||18 years 4 months||£1,318|
|£25||£1,010||5 years 2 months||£547|
The following chart shows how the time to become debt free is drastically reduced if the minimum payment floor is higher, for those who only pay the minimum amount due each month.
Should You Only Pay the Minimum Each Month?
While the discussion in this article surrounds the topic of minimum payments, cardholders should absolutely try to pay as much more than the minimum amount as they can each and every month. Doing so will reduce both the total interest paid over the life of the debt and the time to be debt free. Generally speaking, credit cards are an expensive form of debt and balances should be reduced as soon as possible.
How to Find the Minimum Payment Floor
The minimum payment floor can be found in the Summary Box for a credit card, in the section labelled, "Minimum Payment." If you're someone who might fall into the trap of paying only the minimum amount each month, you may want to consider a card with a £25 minimum payment floor. It will surely save you time and money in the long run.
The following table shows the minimum monthly payment floor for a list of UK credit cards. This alphabetical list is not exhaustive and is meant to only illustrate the range of floors available in the market.
|Card Card Provider||Minimum Monthly Payment Floor|
^When the outstanding amount falls below the floor, your final payment will be the remaining outstanding amount (less than the floor).