Ever wonder how credit cards calculate your minimum payment? Ever wonder why minimum payments are so small compared to your full balance?

A credit card minimum payment is the smallest amount you must pay to your credit card company each month to avoid a late fee, which often results in a negative mark on your credit report.

The minimum payment is usually $10 - $15 or 2% of your outstanding balance, whichever is greater.

For example, if you have a credit card balance of $5,000, the minimum payment might be $100.

Some credit cards may set minimum payments at 4% of the outstanding balance, and some consumer advocates and lawmakers are pushing to require all credit cards to charge at least 4% as a minimum payment.

Why?

While credit card minimum payments make carrying a large credit card balance “affordable” for consumers on a monthly basis, what consumers do not realize is that most of the amount they pay each month is go to interest, not the principal of the loan.

Let’s take the $100 minimum balance on the $5,000 loan. If your annual percentage rate on that loan is 20%, your monthly interest due would be about $84. That means of the $100 minimum payment, just $16 is reducing your principal. Next month your balance due will be $4,984 and your minimum payment of $99 will consist of $83 in interest and, again, just $16 in principal.

This is why it can take twenty to thirty years to eliminate a credit card balance by paying only the minimum payment due.

By increasing the minimum payment due to 4%, or $200 in our example, you would be paying $116 towards the principal. You merely double the monthly payment, but you pay down more than seven times the amount of principal.