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Here's How the Minimum Payment Floor on Your Credit Card Could Cost You Hundreds of Pounds
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 Minimum Monthly Payment Calculated?
The minimum monthly payment is an amount you must pay to your credit card each month to avoid incurring extra charges and being reported to credit agencies. The size of the minimum payment will depend on your APR, your outstanding balance and any default charges.
How do Credit Cards Calculate Minimum Payment?
Each credit card company has their own rules for calculating your minimum monthly payment, but typically a minimum monthly payment is calculated as the highest of:
- £5 (or the full outstanding balance if it's less than £5)—this is called the "floor"
- 2.5% of the balance
- 1% of the balance plus interest and default charges
What is the Floor of the Minimum Monthly Payment?
The minimum monthly payment "floor" is a small amount that your minimum monthly payment will never fall below. Most credit cards impose a floor of only £5 but some credit card providers (e.g., Tesco Bank, Amex and Vanquis) have a higher floor between £10 and £25.
At first glance, a smaller floor may seem better—but 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. A higher floor helps you pay back debt sooner and pay less in interest charges.
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 card holder a whopping £770 in interest charges over the life of the debt—that's nearly as much as the original balance!
When Does the Floor Kick In?
If you don't add to credit card balances, your minimum payment should decline over time as you reduce the amount owed. Why? The minimum payment is (in part) calculated as a percentage of the balance. So as the balance drops so do the minimum payments—until the "floor" is reached.
For most credit cards charging 19.9% APR, a £25 floor would kick in for balances below £1,000 or so (if your minimum payment is calculated using 1% of the amount owed, not a higher amount). 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 | £200 | 18 years 6 months | £1,390 |
| £25 | £1,000 | 5 years 4 months | £599 |
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 it's critical to pay the minimum amount each month (to avoid default charges, being reported to credit agencies, etc.), it's actually really important to pay MORE than the minimum each and every month. The more you pay, the better. Paying as much as you can over the minimum each month will:
- Reduce the total amount of interest you pay over the life of the debt
- Reduce the time to become debt free.
Generally speaking, credit cards are an expensive form of debt and balances should be reduced as soon as possible, which you can help along by paying more than the minimum each month.
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 pay only the minimum amount each month, you may want to consider a card with a £25 minimum payment floor to save money in interest charges 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 |
|---|---|
| American Express | £25 |
| Aqua | £5 |
| Asda | £5 |
| Barclays | £5 |
| Halifax | £5 |
| HSBC | £5 |
| Lloyds | £5 |
| Marbles | £5 |
| MBNA | £25 |
| Partnership Card | £5 |
| RBS | £5 |
| Sainsbury's | £5 |
| Tesco | £25 |
| Vanquis | £10 |
| Virgin Money | £25 |
For more information on the implications of minimum payment floors, please see our Top Tips to Reduce Credit Card Interest Payments.