Minimum payments on revolving credit are calculated as a small percentage of the balance, subject to a floor. Paying only that amount produces repayment periods that surprise people.
This explains the mechanism. Anybody struggling with debt should contact a free debt advice service, which exists in most jurisdictions.
How the minimum is calculated
Typically a percentage of the outstanding balance, or a fixed minimum amount, whichever is greater, plus any interest and charges in some structures.
Because it is a percentage of a declining balance, the payment falls as the balance falls.
Which produces a long tail. Each payment is smaller than the last, the balance declines more slowly, and the repayment period extends considerably.
The scale of the effect
Worth seeing rather than being told.
A balance on a typical credit card rate, repaid at the minimum, commonly takes many years to clear, and the total interest paid can approach or exceed the original balance.
Regulators in several jurisdictions have required this to be disclosed on statements, precisely because the effect is so counterintuitive.
Those disclosures typically show the time to repay at the minimum alongside the time and cost at a higher fixed payment, and the comparison is stark.
Why the fixed payment changes it so much
The mechanism is straightforward once stated.
A fixed payment does not decline as the balance does, so an increasing proportion of each payment goes to principal rather than interest.
Which compounds in the borrower's favour, shortening the term dramatically relative to a declining payment.
The disclosure comparisons commonly show a fixed payment clearing a balance in a small fraction of the minimum-payment period, at a small fraction of the interest cost.
The order of application
A detail that has been the subject of regulation.
Where a balance carries several rates — purchases, cash advances, promotional balances — the order in which payments are applied determines how quickly the expensive portion clears.
Rules requiring payments to be applied to the highest-rate balance first have been introduced in several jurisdictions, following practices that applied them to the cheapest first.
Which means the position depends on the jurisdiction and the card, and it is worth knowing which applies.
Promotional rates
Where the arithmetic changes and can go wrong.
Zero or low-rate promotional periods on transfers or purchases genuinely reduce cost during the period.
What matters is what happens at the end. A balance remaining when the promotion expires reverts to the standard rate.
Which means the useful approach is to calculate the payment required to clear the balance within the promotional period, and to make that payment rather than the minimum.
Transfer fees also need including in the calculation, since they are a real cost paid upfront.
The persistent debt provisions
A regulatory development worth knowing about.
Rules in some jurisdictions require lenders to intervene where a customer has paid more in interest and charges than principal over an extended period.
The intervention typically involves contacting the customer, proposing a repayment plan, and in some cases suspending the card.
Which is a genuine protection and it depends on the jurisdiction, and it addresses precisely the situation where minimum payments have produced a static balance.
The practical arithmetic
What to actually do with a balance.
Establish the rate, which is on the statement and is frequently higher than people believe.
Use a repayment calculator, which regulators and consumer organisations publish free, to see the term and cost at the minimum and at various fixed payments.
Set a fixed payment that clears it in a defined period, and pay that regardless of what the minimum falls to.
And set the automatic payment to at least the minimum as a backstop, since a missed payment is considerably more damaging than a small one.
The wider point
Minimum payments exist to keep an account in good standing, not to clear a balance.
Which is not a criticism of the design so much as a description of it, and treating the minimum as the intended repayment is the misunderstanding that produces the long tail.
What the statement is required to show
Worth reading since it does the calculation for you.
Statements in several jurisdictions must display the time to clear the balance at the minimum payment, and the total cost, alongside a comparison at a higher fixed payment.
That box is on the statement, is generally ignored, and contains the entire argument of this piece in a form specific to your actual balance.
Which makes reading it once considerably more persuasive than any general explanation.
Direct debits and the safe default
A practical arrangement worth setting up.
Setting an automatic payment for the full statement balance clears the card monthly and avoids interest entirely, where the funds are available.
Setting it for a fixed amount above the minimum produces predictable repayment.
Setting it for the minimum protects against missed payments, which damage a credit file considerably more than a high balance does.
Whichever is chosen, having one in place is the protection against the single most damaging outcome, which is forgetting entirely.