A minimum interest charge (also referred to as minimum finance charge) is a small fee charged by a credit card company on outstanding balances owed by cardholders.
Many cardholders don’t know what minimum interest charges are, even though it’s a pretty important aspect of having a credit card. So, let’s take a closer look at credit card minimum interest charges and why it matters to you and your personal finances.
Minimum Interest Fees and How They Work
You can expect to pay a minimum interest charge when your credit card has a very small outstanding balance. These charges are disclosed in the credit card agreement, and they can vary depending on the credit card issuer.
If the account balance on a credit card is so low that the interest charge you owe for that billing cycle would be under the minimum interest charge, that’s when credit card issuers charge you this fee.
The monthly minimum finance charge is often around $1, but it can be lower than that. Generally, a minimum interest charge between $0.50 and $2.00 is considered “normal.”
However, a minimum interest charge is probably the least of your worries as a cardholder. This small fee is just a drop in the ocean considering annual fees, late payment fees, balance transfer fees, cash advance fees for borrowing money against your credit card, foreign transaction fees, and over-limit charges.
It’s important to read up about all credit card fees your chosen credit card issuer charges before signing up for a credit card. Doing this helps you stay in the know about any charges you may incur while using your credit card.
Minimum Interest Charges vs. Minimum Payments
These two terms sound similar but are very different. Here’s what they are and how not to get them confused:
- Minimum interest charge: If you don’t pay your entire balance by the due date, you’ll be charged interest on the outstanding balance. The minimum interest charge is the smallest amount you’ll be charged for interest on your credit card account.
- Minimum payment: Your minimum payment is the minimum amount you must pay each month to keep your account in good standing. Your minimum payment will usually be calculated as a percentage of your total balance, plus any fees due. While it’s essential to make at least your minimum payment each month, keep in mind that paying only the minimum will mean you’ll pay more in interest over time. Try to pay more than the minimum each month to reduce your overall debt sooner.
Minimum Interest Charges for Major Credit Cards
Let’s look at how much some of the most popular credit card companies charge.
Remember, a “normal” minimum interest charge is between $0.50 and $2.00. So, if your credit card issuer charges you much more than that, you’re overpaying, and it’s probably worth looking for a better provider.
- Discover bank minimum finance charge: $0.50
- Citibank minimum interest charge: $0.50
- Chase bank minimum interest charge: None
- Wells Fargo minimum interest charge: $1
- US Bank minimum interest charge: $2
As you can see, these charges vary by bank, which is why it’s always best to read your cardmember agreement for the full picture.
How to Avoid Minimum Interest Charges
Fortunately, avoiding minimum interest charges isn’t rocket science.
To avoid minimum interest charges altogether, you’ll need to pay off your credit card balance on your billing statement in full each month.
To do this on time, you’ll need to know your payment due date and the grace period for your credit card. Pay off any money you owe before that day, and you won’t incur minimum finance charges.
If you’re finding this hard, help yourself by planning and budgeting as much as possible. Regularly keep an eye on your credit card balance and set reminders for yourself before the payment is due to stay on top of them.
When you pay off your balance in full, you’re also improving or maintaining your credit score and keeping your account in good standing. Lenders will view your credit history, and your credit score is very important when deciding what interest rates and loan terms to offer you in the future.
If your credit card company offers introductory rates, then they may not require you to pay a minimum interest charge and other fees for a set time period. While no one likes paying fees, and introductory periods may sound great, there’s a catch.
These introductory rates can be very confusing and a bit risky because you get used to spending and not paying any fees on your credit card.
Cardholders often take things for granted, and when their introductory period ends, they are shocked by the various amounts in fees they’re suddenly paying. Or, worse yet, don’t notice them and just think that’s how much they’ve spent.
Do check if you have an introductory rate on your card and make sure you know what it means and when it ends to avoid unpleasant sneaky charges.
Annual Percentage Rate
There’s a difference between a credit card’s minimum interest charge and the annual percentage rate. To understand this difference, let’s define what the annual percentage rate is.
Credit card issuers calculate your credit card interest as an annual percentage rate (APR). Some credit card companies have variable rates, going up or down over time.
The average APR in the states was 16.17% in the first quarter of 2022 (according to data from Federal Reserve). While different sources say different things, Federal Reserve data is one of the most trustworthy sources to look for this information.
To understand how APR affects your minimum interest charge, let’s do some math. We’ll round up the average APR to 17% to simplify things. We’ll also use a simplified formula for the calculation. Otherwise, things will get tricky.
So, imagine you’ve carried over a balance of $50. You wouldn’t pay 17% (APR) of $50 ($8.5) once if this happened.
As there are 12 months in a year, you’d need to pay $8.5 divided by 12, or $0.70 per month.
But, because your credit card issuer also has a minimum interest charge (let’s say, $1), you’ll pay that instead of the $0.70 fee you should be paying. So, if you’ve got an outstanding balance of $50 for the whole year, you’ll be paying $12 instead of the $8.5 you should be paying.
While these fees may not sound like a lot, they can add up quickly if you’re not careful.
Make Sure You Read Your Credit Card Agreement
Don’t let these pesky credit card charges take you by surprise. Read your credit card agreement and double-check how much you’ll be charged for things, including the minimum finance charge.
Keeping tabs on these costs and charges is key if you want to make the most of your credit card without ruining your credit score.
Credit Card Terminology
When reviewing your user agreement, you may come across many terms you’re not entirely sure about, as they have many similarities.
To help you get your head around this finance jargon, we’ve listed the key terms you may need to know to understand your credit card agreement fully:
- Billing statement: A document that a credit card issuer sends you every month showing much you owe and your spending information.
- Credit card interest rates: These refer to the annual percentage rate (APR) that the credit card company charges cardholders for borrowing money (i.e., using their credit card).
- Variable rates: Interest rates that can change during the loan term. They’re tied to the economy’s index rate, and the credit card issuer doesn’t need to notify you about any changes to your rate.
- Credit reports: These reports are used by lenders to review your credit history and assess how likely you might default on credit.
- Grace period: A period during which a credit cardholder can make a payment without having to pay interest between the end of your billing cycle and the payment due date.
- Balance transfer: A balance transfer refers to transferring an outstanding credit card balance to a new credit card that offers a lower interest rate.
- Balance transfer fees: You will be charged balance transfer fees for initiating this balance transfer. You should see those in your credit card agreement.
- Cash advance: An amount of money that a cardholder uses their credit card to withdraw.
- Cash advance fees: How much a credit card issuer charges when the credit card holder uses their credit card to withdraw cash from an ATM or bank.
- Minimum finance charge: A minimum finance charge is essentially a minimum interest charge: the smallest amount of money that a credit card issuer will charge for monthly interest payments.
- Minimum monthly payment: Your minimum monthly payment is the least amount of money you can pay each month to avoid late payment fees.
- Late payment fees: Fees that a credit card company charges when the borrower doesn’t make a payment by the payment due date.
- Over-the-limit fees: A fee that a credit card issuer charges a borrower when they exceed their credit limit.
- Prime rate: An interest rate that lenders use to determine what interest rates to charge for credit cards, mortgages, and many other loans.
- Average daily balance: The sum of the account balance of all debits and credits of each day divided by the total number of days in a billing cycle.
Frequently Asked Questions
How do you avoid minimum interest charges?
The best way to avoid paying a minimum interest charge is to pay off your statement balance in full within the grace period of your credit card company.
Doing this keeps minimum and other interest charges at bay and helps avoid getting into credit card debt.
The best thing? You get to make purchases on your credit card and reap credit card rewards for using it as normal – but without paying any credit card interest.
Do I get charged interest if I pay the minimum?
When you use a credit card, you borrow money from the credit card issuer.
You will accrue interest on the outstanding balance of your credit card if you do not pay off the full balance each month. If you only make the minimum payment, the credit card issuer will still charge you interest on the remaining balance.
Card companies typically calculate interest charges using a daily periodic rate. If you have a balance on your credit card at the end of your billing period, you will be charged interest for each day of your billing cycle.
It’s important to pay off your credit card balance in full each month to avoid paying interest charges.
What is a charge for interest?
When you carry an outstanding balance on your credit card from month to month, your credit card issuer will start charging you interest on that balance. This fee is called an interest charge. The interest charge amount is usually a percentage of your outstanding balance, and it is added to your balance each month.
For example, if you have a credit card with an annual percentage rate (APR) of 18% and a balance of $1,000, your monthly interest charge would be $1.50 ($1,000 x 0.18% = $1.50).
Interest charges can add up quickly, so it’s important to make sure your credit card balance is paid in full each month to avoid interest. You’ll save money and keep your credit card costs under control by paying the total amount.