Help me understand this about payments...

[CreditScoreImprovement24]

So, out of sheer curiosity (and as a newbie), I was curious about how minimum payments work.  I always pay in full just because my dad drilled it into me.

***Say for example....you have a credit card with NO intro period of zero apr (and minimum payment being the greater of 1% or $40).  If I max out the card to 100% utilization this cycle (2000 limit say so 2000/2000 used), and I have been paying in full all this time.......when the statement hits, the minimum payment will only be $40 right?  However, what happens after this $40 payment in regard to interest added etc?

***If I understand correctly, the first minimum payment will be a mere $40 but then the next statement will have a much larger minimum payment of $40 plus the interest on the $2000 balance?  ***So, the first minimum payment I make (provided I have been paying in full), will NOT have any interest at all, just $40, then next minimum payment will be $40+interest?  If so, do creditors do this as a TRAP essentially? 

The next statement balance will be over the limit?!?!  Because interest will be say $50 if for example you have a 30% apr.  So the next statement balance will be over the limit (1960 rolled over from last cycle + 50 = $2010)?  Would that be allowed by the creditor?  And just to make sure I understand how this works, the statement balance will be $2010 and the new minimum payment would go from $40 last time which was the "trap" to .... $40 + $50 = $90 .... $90 this time?!?

Thanks!

[Anonymous]

Minimum payments are set up so that (providing you made no more charges) you CAN pay off the entire balance just by paying minimums.  Each statement usually has a box demonstrating this, including the LONG time it would take.   So the balance never increases, but the issuer gets a lot of interest over time.

[Minimalist]

That's the key, it takes WAY longer to pay off than just a simple PIF would, years even.  There have been some times I've had to make minimums for a month or two, but I never prolong it.  PIF should really be the only option unless absolutely necessary.  If someone continues the minimum payment pattern long-term, I seriously question whether they should be using credit cards at all, and just stick to debit or cash.

[Thomas_Thumb]

Any balance not paid will be subject to apr fees that will get added to a subsequent months balance.

My understanding is the minimum due will exceed monthly interest by a token amount. Thus, if no more charges are put on the card, it will eventually get paid off just by making minimum payments. The payoff time frame might be 5 or more years.

Unfortunately, for a $2k balance, you could end up paying more than $2k in interest before balance is paid to $0. It all depends on apr %. Some issuers reportedly went as high as 34.9% apr.

[Kforce]

As others have said, most card issuers have a formula that will pay off the debt.

To aid those that need a low payment for a couple of months the minimum is usually at a threshold not much above the interest & fees.

It is very costly to only pay minimum numbers.

Your question is interesting in that with interest rates  > 24% many fixed 2% minimum payment cards would become upside down.

It use to be quite common for the grater of 2%  or a fixed $25-$50 dollar as a minimum.

I believe most have added a third clause to cove ever increasing interest.

Sample from one of my CU's

Your $2000 at current average APR of 29%  with this CU's high interest option (b).

Monthly interest would be 2.417% and with the extra 1% = (3.417 * balance) as minimum each month.

At month 55 you would then hit the $40 minimum threshold for remaining payments.

It would take 105 months and cost   ~ $2,891  in interest.

Starting Balance : 2000.000
Rate - Percent : 29.000 %
Minimum Payment : 68.340
Minimum Pmt Rate : 3.417
Lowest Minimum Pmt : 40.000

Payment           Principal               Interest                   Balance            yyyy/  #
--------------------------------------------------------------------------
68.34                   20.01                    48.33                         1979.99             2025     1
67.66                    19.81                     47.85                          1960.18              2025     2
66.98                    19.61                    47.37                           1940.57             2025     3
...................................................................................................................
40.52                   11.87                   28.65                              1173.85            2029    53
40.11                      11.74                   28.37                              1162.11             2029    54
40.00                   11.92                   28.08                              1150.19           2029    55
...................................................................................................................
40.00                 38.40                 1.60                                  28.00             2033   104
28.68                   28.00               0.68                                  0.00                2033   105
-------------------------------------------------------------------------

Total              4890.76

 Interest       2890.76                          

Years/Mo    8.75y  / 105 months