Credit Card Minimum Payments

Credit Card Minimum Payments
Pauline Smale
Economic Analyst
Government and Finance Division
Summary
Revolving credit cards generally require a minimum payment for each statement
period. The creditor uses a fixed percentage or formula to calculate each month’s
minimum dollar amount. Low minimum payment requirements have been challenged
by consumer advocates as a contributing factor to the mounting credit card debt held by
U.S. households as they raise the cost by extending the time it takes to pay off the credit.
Guidelines on credit card lending, issued in January 2003 by four federal regulators of
depository financial institutions, were critical of the general easing of minimum payment
requirements by credit card issuers. The guidelines, issued because of safety and
soundness concerns, communicated expectations of more prudent practices. In
response, credit card issuers began adjusting their minimum payment formulas, raising
the amount of the required monthly payment. Congress has focused on the need to
increase consumer awareness of the financial jeopardy that can result from paying only
the required minimum. The Bankruptcy Act of 2005 (P.L. 109-8, 119 Stat.23) requires
the placement of a standardized minimum payment warning on every periodic statement.
Several bills have been introduced in the 110^th Congress that would enhance the
disclosure to cardholders regarding minimum payments.
This report provides an overview of the issues and congressional action. It will be
updated as events warrant.
Background
Although there is no absolute industry standard for credit card minimum payments,¹
they are a ubiquitous requirement of revolving credit card programs. The formulas used
to calculate the monthly minimum payment can vary by issuer and type of account, but²
typically the payment is calculated as a percentage of the outstanding balance. The

¹ As opposed to charge cards which require the full balance to be paid each month.
² Some issuers may calculate the minimum payment as a percentage of the outstanding balance
plus any finance charges, late fees, or other fees, issuers may use a flat fee, and others may use
(continued...)

periodic statements received by the cardholder do not show the formula calculations. The
statement instead presents the cardholder with the dollar amount of the minimum payment
for that particular billing cycle.
In the 1970s, the average minimum payment was about 5% of the outstanding
balance; by 2000, it was around 2%.³ The decline in minimum payment requirements is
usually attributed to competitive pressures in the credit card industry. Thousands of
depository financial institutions offer bank cards to consumers. A downward trend in
credit card interest rates, aggressive marketing efforts (by mail, phone, and Internet), and
product innovations (such as the elimination of annual fees and creative balance transfer
offers) have made it easier for consumers both to obtain credit cards and switch among
issuers. Lower minimums, reward programs, and enhanced customer service are
examples of practices used by card issuers to maintain customer loyalty. Easing minimum
payment requirements can also be viewed as a technique (similar to new penalty fee
structures and shortened grace periods) employed to maintain portfolio profitability by
preserving outstanding balances.
Consumer advocates have long been concerned about the growth in credit card debt.
Revolving consumer credit outstanding (which is made up primarily of credit card debt)
totaled $238.6 billion at year end 1990. By year end 2000, the total had grown to $678.5
billion. From 2000 to 2007 consumer revolving debt increased an additional $260 billion
plus, rising to $941.8 billion.⁴ Consumer advocates argue that the aggressive marketing
campaigns launched by credit card issuers in the 1990s contributed to an increased
dependence on consumer credit. In this view, too many households are holding a level
of debt that could easily cause major financial difficulties if the family experienced an
unexpected occurrence such as an illness or job loss. Low minimum payment
requirements can encourage consumers to take on more debt, and consistently paying the
minimum greatly extends the time and cost of paying off that debt.
Policy Issues and Actions
Recently, both Congress and the federal regulators of depository financial institutions
have questioned how well consumers understand the costs involved with using credit
cards. Attention has been focused on the transparency of the terms and conditions
applicable to cards. Minimum payment requirements have been part of the discussion.
Federal regulatory guidance issued in 2003 dealt with safety and soundness issues raised

² (...continued)
formulas that vary based on the APR (annual percentage rate).
³ Testimony of Travis B. Plunkett, Legislative Director of the Consumer Federation of America,
in U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Examining the
Current Legal and Regulatory Requirements and Industry Practices for Credit Card Issuers With^th^st
Respect to Consumer Disclosures and Marketing Efforts, hearings, 109 Cong. 1 sess.,
May17,2005, p.8, at [http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&hearing
ID=154].
⁴ Data (in current dollars) from Federal Reserve Statistical Release G.19, Consumer Credit,
available at [http://www.federalreserve.gov/releases/g19/hist/cc_hist_sa.html] and
[ h t t p : / / www.f e de r a l r e s e r ve .gov/ r e l e a s e s / g19/ c u r r e nt ] .

by credit card accounts management practices. The 2005 Bankruptcy Act and the
subsequent proposed amendments to Federal Reserve Board of Governors’s Regulation
Z⁵ addressed minimum payment disclosures. During the 110^th Congress, improved
disclosure of credit card terms and conditions (including revisions to minimum payment
notices) has been the subject of oversight hearings and proposed legislation.
Regulatory Guidance
In January 2003, four federal regulators of depository financial institutions⁶ jointly
issued interagency guidance on credit card lending.⁷ The guidelines stated that recent
examinations of financial institutions by the regulators found credit card account
management practices that raised safety and soundness concerns. The guidelines
described the concerns and the corrective changes for practices deemed inadequate or
imprudent. The guidelines also recognized that the time required to implement changes
could vary among individual credit card issuing institutions.
A section of the January 2003 guidelines dealt with minimum payment requirements.
The agencies recognized a pattern of general easing of these requirements in recent years,
noting that new formulas can have the effect of delaying principal payment. Of particular
concern were accounts experiencing “negative amortization,” a situation where the
monthly minimum payments consistently fall short of even covering all of the finance
charges and fees, and that therefore the outstanding balance continues to grow. The
situation can be exacerbated by programmatic, recurring over-limit fees and other charges.
The regulators view these fees as inappropriate if they are primarily intended to increase
recorded income for the lender rather than as a tool to enhance the borrowers’
(cardholder) performance or their access to credit. Liberal repayment programs can
increase credit risk, mask portfolio quality, and compound or protract consumer debt. The
account management changes expected by the federal regulators included minimum
payment requirements that would effectively amortize the current balance over a
reasonable period of time.
Since the guidelines were issued, a number of large issuers of bank credit cards
(including Bank of America, Citibank, MBNA, and JPMorgan Chase) have begun
increasing their minimum payment requirements. The average minimum payment is
expected to rise to about 4%. The following example shows what a difference an increase
from 2% to 4% could mean to a cardholder. A cardholder with a $10,000 balance in a
payment program with a 2% minimum and a 16% interest rate would need more than 40

⁵ The Federal Reserve’s Regulation Z implements the consumer protections in the Truth in
Lending Act (P.L. 90-321, 15 U.S.C. 1601et. seg, 82 Stat. 146) requiring uniform methods for
computing the cost of credit and for disclosing credit terms.
⁶ Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System,
Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.
⁷ The Federal Reserve Board, “FFIEC Agencies Issue Guidance on Credit Card Account
Management and Loss Allowance Practices,” joint press release, January 8, 2003, at
[ ht t p: / / www.f e der a l r eser ve .gov/ boar ddocs/ pr ess/ bcr e g/ 2003/ 20030108/ def a ul t .ht m] .

years to pay off the balance and pay a total of $19,329 in interest. The same cardholder
with a 4% minimum would need about 14 years and pay a total of $4,931 in interest.⁸
2005 Bankruptcy Act
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-
8, 119 Stat. 23) was enacted in April of 2005. Section 1301 of P.L. 109-8 provided for
new disclosures for minimum payments. This section amends the Truth in Lending Act
(P.L. 90-321, 15 U.S.C. 1601 et.seg, 82 Stat. 146) that is implemented by the Federal
Reserve Board of Governor’s Regulation Z. New generic disclosures would be required
on the front of each periodic statement received by a credit cardholder. The information
must include a warning that indicates paying only the required minimum will increase
both the total interest paid and the time it takes to repay. A hypothetical example of these
consequences must be presented. Finally, a toll-free number where the cardholder can
find an estimate of the time it would take to repay their individual account balance will
be included. The Federal Reserve is directed to prepare a table in order to standardize the
information provided to cardholders using the toll-free phone resource.
The Federal Reserve sought public comment on how the Board should implement
the minimum payment provisions and other amendments made by P.L. 109-8 to the Truth
in Lending Act. The Federal Reserve requested data or comment on specific issues
presented in a series of questions.⁹ The issues reflected the potential problems raised by
alternative approaches to estimating repayment periods, assumptions used in various
calculations, the different terms and conditions connected to the variety of credit card
programs offered by depository financial institutions, and the need for clear and
conspicuous disclosures. Questions also explored providing personalized notices on
periodic statements.
On May 23, 2007, the Federal Reserve issued a proposed rule amending Regulation
Z.¹⁰ The proposed revisions include minimum payment disclosures for credit card issuers
required by the 2005 Bankruptcy Act. The Board’s proposal would require issuers to
provide, in each periodic statement, a warning statement about the effects of making only
minimum payments, a hypothetical example, and a toll-free number to call for an estimate
of the time it would take a cardholder to repay their individual account balance. A credit
card issuer may choose to establish a toll-free number that provides cardholders with the
actual number of months it would take to repay their outstanding account balance as
opposed to an estimate. Those issuers would not be required to include a hypothetical
example on periodic statements. In addition, credit card issuers could chose to provide
the actual repayment information on the periodic statement. Issuers that choose this
method of disclosure would not be required to provide a warning statement, a hypothetical
example, or a toll-free number. Finally, the Board proposed guidance on how to calculate
generic repayment estimates as an more useful alternative to issuing a table. The

⁸ Mara Der Hovanesian, “Tough Love For Debtors,” Business Week, April 25, 2005, p. 99.
⁹ Federal Reserve press release October 11, 2005, at [http://www.federalreserve.gov/boarddocs/
press/bcreg/ 2005/20051011/default.htm] .
¹⁰ The proposed rule can be found at [http://www.federalreserve.gov/newsevents/press/
bcreg/ 20070523.htm] .

guidance can facilitate the use of automated systems to provide the required disclosures;
the guidance can also be used to generate a table. Cardholders using the toll-free number
would be prompted to input information about their outstanding balance and the APR
applicable to their account. Additional guidance was proposed on how to calculate
customized or actual repayment disclosures to encourage issuers to provide these
disclosures to cardholders.
110^th Congress
Congress has continued to use its oversight role to actively monitor the advances,
changes, and growth of the credit card industry. During the first session of the 110^th
Congress, oversight hearings were held by both Senate and House Committees¹¹ to
examine the terms and conditions of credit card programs as well as the marketing,
billing, and disclosure practices of the credit card industry. Minimum payment
requirements were included in the discussion.
There was general agreement expressed during the hearings that consumers need to
be better informed and educated on the benefits and drawbacks of credit cards and the
terms and conditions of these financial products. Consumer advocates continue to support
mandatory personalized minimum payment disclosure notices. Industry representatives
support the option of providing customized information and expressed concern over the
potential costs involved with providing personalized notices.
Legislation (including three bills in the House and two in the Senate) that would
enhance the minimum payment disclosures required in the cardholder’s periodic statement
has been introduced in the 110^th Congress.
^!The Credit Card Accountability, Responsibility, and Disclosure Act of
2007 (H.R. 1461) was introduced on March 9, 2007, by Representative
Mark Udall, and cosponsored by 40 other members to date, and was
referred to the House Committee on Financial Services. Section 201 of
the bill addresses minimum payment disclosures. The legislation would
mandate a personalized notice providing repayment information that
would apply to the cardholder’s outstanding balance. The information
would include the minimum monthly payment as both a dollar figure and
as a percentage of the outstanding balance.
^!The Credit Card Repayment Act of 2007 (H.R. 1510) was introduced on
March 13, 2007, by Representative David E. Price, and cosponsored by

¹¹ The following is a list, in chronological order, of the hearings held:
January 25, 2007, Examining the Billing, Marketing, and Disclosure Practices of the Credit Card
Industry and Their Impact on Consumers, Senate Committee on Banking, Housing, and Urban
Affairs; March 7, 2007, Credit Card Practices: Fees, Interest Rates, and Grace Periods,
Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and
Governmental Affairs; April 26, 2007, Credit Card Practices: Current Consumer and Regulatory
Issues, Subcommittee on Financial Institutions and Consumer Credit of the House Committee on
Financial Services; and June 7, 2007, Improving Credit Card Consumer Protection: Recent
Industry and Regulatory Initiatives, Subcommittee on Financial Institutions and Consumer Credit
of the House Committee on Financial Services.

15 other members to date, and was referred to the House Committee on
Financial Services. This bill would require a customized notice
providing information to cardholders about paying off their outstanding
balances using the minimum rate. The notice would include the total
time to pay off the balance as well as the total cost.
^!The Credit Protection Act of 2007 (H.R. 3421) was introduced August
3, 2007, by Representative Nita M. Lowey and was referred to the House
Committee on Financial Services. Section 3 of the bill would require the
cardholder’s minimum monthly payment to be presented as both a dollar
figure and as a percentage of the outstanding balance. The disclosure
would include information on the total time to pay off the balance as well
as the total cost.
^!The Credit Card Minimum Payment Warning Act of 2007 (S. 1176) was
introduced on April 20, 2007, by Senator Daniel K. Akaka and was
referred to the Senate Committee on Banking, Housing, and Urban
Affairs. Section 2 of the bill would require the disclosure of the number
of years and months it would take to pay the cardholder’s outstanding
balance if only the minimum monthly payment was made. The total cost
to the cardholder would be separated into interest and principal.
^!The Credit Card Minimum Payment Notification Act of 2008 (S. 2542)
was introduced on January 22, 2008, by Senator Dianne Feinstein and
was referred to the Senate Committee on Banking, Housing, and Urban
Affairs. Section 2 of the bill would require the card issuer to choose
among several minimum payment disclosure options. The options
include hypothetical examples, individualized information estimating the
time and cost of paying the outstanding balance, and a toll-free number
to obtain individualized information. None of the bills have been
reported from committee.