It’s nice of your credit card company to give you the option to pay off your balance over time with small, minimum monthly payments. However, while this option does give you flexibility, it’s mostly designed to keep you in debt.




A while back, I noticed a popular issuer actually listed “the ability to pay off your balance over time” as a perk to using their credit card. Nice spin, but this is less of a customer benefit than it is a business model. Your revolving balance earns interest, which is how credit card companies make money. Most people assume this, but Forbes explains the history of how minimum payments are designed to keep you in debt.


In the 1970s, most card issuers required a minimum monthly payment of 5% of the outstanding balance. However, Andrew Kahr, a financial services consultant, convinced many of the issuers to reduce that number to 2%.

“The lower payments gave customers more flexibility, but “of course the bank has a potentially much more profitable account,” he said. When issuers saw just how profitable the change could be, Kahr’s innovation quickly became mainstream. By the early 2000s, 2% minimums were the new normal.

In an interview with Frontline, Kahr explained what most consumers already know: credit card companies prefer customers who revolve a balance because those customers are more profitable:

...it is the cardholders who revolve, who use the debt, who pay finance charges, who contribute, cover the overhead, provide some profit for the lender. So someone who always pays in full in 30 days, 45 days, doesn’t incur any charges of any kind, has the card for free, the bank does get some income from that because of the way the clearing relationship with a MasterCard and Visa is structured...but it’s not enough to cover the costs, or not more than very barely...The profit is made by lending.


About ten years ago, federal rules were established that require issuers to cover fees and accrued interest in minimum payments. This at least made it a little easier for consumers to avoid a never-ending downward spiral of debt. However, today, most issuers charge only 1% of the balance, plus interest and fees. (Forbes points out that many credit unions and a few major issuers still charge 2%).




On the other hand, none of this matters if you pay your credit card balance in full and on time, which you should try to do anyway to avoid interest and fees. Also, relaying this info isn’t about blaming the credit card companies. A lower minimum balance can help consumers in times of financial stress, after all.

However, if you’re revolving a balance every month, it’s more useful to see this flexible “perk” for what it truly is: a plan to keep you in debt. For more on the topic, Forbes’ full post is worth the read and the full Frontline interview is also available at the link below.


Secret History of the Credit Card | PBS via Forbes

Photo by openDemocracy .