What does paying only the minimum payment really cost?

Most articles about minimum payments answer with an average. Your statement answers with your number, and it is required to.

The box you have been scrolling past

Regulation Z requires a repayment disclosure on the periodic statement. The warning itself is prescribed wording: "Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance." ¹

Alongside it the issuer must show, for your balance at your rate:

• An estimate of how long it would take to repay the balance making only minimum payments.
• The monthly payment that would clear the balance in 36 months.
• A statement that the issuer estimates full repayment within three years at that payment.
• The total cost of the 36-month route, and the saving compared with paying the minimum.

There is a harsher variant for the worst case. Where payments would not cover the interest accruing, the statement must say instead that "Even if you make no more charges using this card, if you make only the minimum payment each month we estimate you will never pay off the balance shown on this statement." ¹

An estimate that says never is not a figure of speech. It means the minimum is below the interest, and the balance grows while you pay it.

Why the minimum is designed to be small

The minimum payment is defined in the agreements as the amount the bill requires by the due date, and nothing more. ³ It is calculated as a small percentage of the balance, or a floor amount, whichever is larger. Two consequences follow from that shape.

The minimum falls as the balance falls, which stretches the tail of the repayment. And a minimum computed on a percentage basis is mostly interest at the start, so early payments move the balance very little.

The part that makes an extra payment worth more than it looks

Payment allocation is not at the issuer's discretion above the minimum. Amounts paid over the required minimum must be applied to the balance with the highest annual percentage rate first.

That is why a card carrying both a purchase balance and a cash advance balance punishes minimum-only payments so heavily. The minimum can be applied where the issuer likes, and the expensive balance sits untouched. The first pound or dollar above the minimum is the first money that reaches it.

Reading your own statement in five minutes

1. Find the repayment disclosure box, usually near the payment information at the top.
2. Note the minimum-only estimate and the three-year monthly figure side by side.
3. Find the interest charge table and check whether more than one APR is listed.
4. If a second APR is listed, that is a separate balance, and it is the one to clear first.
5. Check whether the card still has a grace period, because if it does not, new purchases accrue interest from the day they post. ²

Step 5 is the one people skip. A card in the middle of a payoff is usually a card with no grace period, which means it is the worst card in your wallet to spend on until the balance is gone.

What to do with the number

The three-year figure on the statement is not a target handed down by a regulator. It is a reference point, chosen because it is the one most people can recognise as achievable.

If it is affordable, it is a good plan, and the statement already tells you what it saves. If it is not affordable, pay what you can above the minimum and keep the card out of use, because both halves of that sentence shorten the timeline.

Where CardLab helps

The statement's box answers the question for one card in isolation, once a month, in the format the issuer chose. Most people who are carrying a balance are carrying it across more than one card.

CardLab holds every card together, with the APR, balance and minimum you enter or import, so you can see which card is the expensive one rather than which bill arrived most recently. The minimum payment calculator runs the same comparison the statement box runs, and hands the balance, rate and payment to the simulator so you can change them and see the payoff move. Where the minimum no longer covers the interest, it says the balance never clears rather than printing a payoff date that will never arrive, which is the same honesty the statement warning requires.

None of it needs a bank login. You enter the cards yourself, or hand over a statement that is read on the device, and nothing is sent to a server to be linked to you.