Credit cards minimum payments are low to keep you in debt, entice you to spend, and for the credit companies to continue earning blockbuster profits.   In 2019, the country’s largest banks, including JPMorgan Chase, Goldman Sachs, and Bank of America, reported a record-breaking $100 billion in profits, with many of them credited their credit card business unit for the sky-high increase in profits.

The credit card market is a big moneymaker for banks, who take advantage of the fragile global middle of the class.  The average rate on credit cards is 16.03% while the average rate on a 30-year fixed mortgage is 2.98%

SUPER LOW MONTHLY PAYMENTS:

This screenshot is from one of the Financial Middle Class’s staff writers.  She pays her credit card balance each month in full.  The balance is from transactions from the last statement.  Her new balance is $3,704.68, but her minimum monthly payment is only $37 or 1 percent of the balance.

The annual percentage rate (APR) on that card is 13%, meaning the minimum interest due on this credit is about $40 ($3,704 x 13%)/12).  The minimum payment is not enough to cover the interest due.

As a result, if she never uses this credit card and just makes the minimum monthly payment, it will take her 15 years to pay off that $3,704 balance.  She will pay an estimated $7,025 worth of interest.

THE SMOKE & MIRRORS OF THE AMERICAN MIDDLE CLASS 

Credit card companies charge incredibly high APR on credit cards and keep minimum balances low because they know that too many Americans are willing to swipe their cards to buy things they can’t afford to express people they don’t like.

Even before COVID-19, when the U.S. unemployment rate was at a historic low, most American consumers carried a high balance on their credit card.  Now, a lot of those credit card balances are on forbearance. The APR clock is still ticking.

Let’s say that the above customer’s behavior did not adjust much and spent about the same for the next billing cycle.

After making the August minimum payment, her new balance will be around $7,451 (old balance-$3,704 +last statement interest-$3, interest on new charges-$40 + new balance-$3,704)

Is it Better to Pay off Credit Card or Keep a Balance?

There is no financial situation where paying off credit balances in full each month does not make sense over the alternative. If you have to keep a balance on your credit card, the amount has to be 30% of the available credit or lower.

Bottom Line

Credit card minimum payments are low because the credit card companies want you to keep your balances high and for as long as possible.  Credit card companies don’t make much money from transactors, who are people who use credit cards for convenience and perks and pay the balance in full each month.