Minimum Interest Charge Definition = 912.99% APR?

A 912.99% interest rate?! Yes, it’s true… due to a minimum finance charge for purchases.

minimum interest chargeAlso referred to as the “minimum interest charge fee” it’s surprising how many people don’t know what this term means. It’s extremely important to know, especially for those outside the United States. So what is it exactly?

Definition: Minimum Finance Charge – The minimum fee charged when a credit card account has a balance subject to interest charges. It only applies when the actual finance charges are less than the minimum finance charge. Usually this amount is $1 or $2.
If you’re still confused let me give you an example… Let’s say you are carrying a $10 balance on your credit card account and paying interest on it (obviously stupid to do, but this is just an example). And let’s say the the monthly (not yearly) APR equaled 1%. That would mean for the first month, you would be charged $0.10 of interest (1% of $10). However if your account has a minimum interest charge fee of $1.00, then that $0.10 would fall below that threshold. So what does the credit card company do? Instead of charging you the actual interest which equals only $0.10, they charge you $1.00 since that is the minimum.

How this charge can magnify your actual interest rate

In a nutshell, if you carry a small balance that is subject to a minimum finance charge, then the actual amount of interest you pay will be higher… since you’re paying the $1.00 to $2.00 per month fee versus the actual (lesser) interest charges. Let me give you a real life example that happened to me several years ago… In order to pay medical bills, I used my Bank of America credit card for a 0% balance transfer offer to the tune of $10,000. Now since that amount qualified for the 0% I wasn’t getting charged any interest on it. However I made a huge mistake… I accidentally used this card to make a small $2 purchase. And since all payments automatically went towards the lower rate balance first (the $10,000 at 0%), not a single penny of my payments went towards paying off that $2 charge (which was accruing at the normal purchase APR). So although the $10k wasn’t costing me a dime of interest, that $2 was! And as you can imagine, with an annual APR of 12.99%, the actual monthly interest on that $2 purchase was only around 3 cents. However, since Bank of America’s minimum finance charge was $1.50 that’s what I got charged each month instead. That means over the course of 12 months, that $2.00 purchase accrued a total of $18.00 ($1.50 x 12) of interest charges! When you do the math, that means my actual realized APR was 912.99 percent!

Will this happen to you?

Thanks to the CARD Act (credit card reform) that is now in effect, your payments are applied towards the higher rate balances rather than the lower rate balances. So my predicament would never happen today, because my payment would first go towards that $2.00 charge, before the 10k at 0%. However in most countries outside of the United States, minimum payments are still applied to lower rate balances first. That means something like this can still happen if you live elsewhere. But believe it or not many people – both in the U.S. and abroad – voluntarily choose to put themselves in a situation like this… still to this day! How so? Well some people falsely believe carrying a balance is better for their credit record, so instead of paying off their balance in full each month, they choose to keep $10 or $20 unpaid. That $10 or $20 then accrues interest and due to the low amount, it almost certainly gets hit with the minimum interest charge instead each month.

One last word of caution

Just a few years ago the average minimum finance charge was $0.50 cents but that has been rapidly creeping up over the past decade. These days, most major credit cards operating through the Visa, MasterCard, American Express and Discover payment networks typically have a minimum finance charge of $1.00, $1.50, or $2.00 (however it’s the bank, not the payment network, that chooses the amount). Store and gas station cards sometimes run even higher as I have seen a few that charge as much as $4.00 per month! So if you take away one thing from this post, it’s that it NEVER makes sense to carry a balance if the amount is so small, that it causes you to be hit with this fee. If you have a balance that tiny, just pay the thing off!

 
Comments
The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Discover Card applies the minimum payment toward the balances with the lowest interest rates. Anything above and beyond the minimum payment goes toward the balances with higher interest rates. They do things in their best interest as opposed to say, Home Depot.

Another thing,my apr is 25.24%,which was applied my cash advance but not to my purchases and balance transfers.my balance transfers and purchases, will not be charged a apr/interest charge fee until 07/15/2015.

I received a cash advance on 11/26/2014,then I was charged a cash advance fee on 11/28/2014.but,I made a payment of 100.12 on my my credit card ,which I owed nothing on,since the balance wasn’t due until 01/15/2015,with a 0% interest rate on purchases and balance transfers.cash advances,are not included in the 0% interest rate on balances,which may or may not,have been placed in the agreement,suspiciously.the minimum interest rate charge fee was placed on my credit card account on 12/16/2014.11 days after I made the 100.12 payment on my credit card account.on,12/28/2014,I called US bank to ask about the charge but the agent that the the minimum interest charge fee,was not fee and that because people are not suppose to use credit cards for advances (which are really the same as pay day loans) then the 0% apr (which ends on 07/15/2014,for me),doesn’t apply to cash advances.even in emergency, if credit cards doesn’t like customers using cash advances then why allow customers to get cash advances.I looked at my agreement which stated the cash advance free but the minimum interest charge fee didn’t clearly appear in the agreement,but I will continue to read my agreement more closely.why would my statement say minimum interest charge fee, but the US bank agent tell that this charge is not a fee?why isn’t cash advances subject to the same 0% apr(interest rate) agreement, as purchases and balance transfers?why Will I still be charged an interest rate after I pay off my balance? I wasn’t satisfied with the response to my questions,from US bank.

I’m sorry, I don’t understand. How does your APR go from 12.99 percent to 912.99 percent? And also,didn’t you have to pay 1.50 in interest for each day you didn’t pay the bill in full? Not just each month?

The balance does accrue usually by the “daily balance method”. However, your interest charge isn’t actually calculated until the end of your billing cycle. So by the end of your billing cycle if you had a balance that would only accrue $0.09 in interest, it is below the minimum. The $1.50 is on a monthly basis.

And to your other question. 12.99% APR (Annual Percentage Rate) equates to a little over .035% interest per day. So if you had a $10 balance, your interest at an APR of 12.99% should only be a little more than $0.10 per month. That $0.10 is only 12.99% APR… However, since the credit card company charges you a minimum interest rate, you now paid $1.50 on that same $10, instead of the ten cents you should have paid. So, remember that daily interest of only .035%? The $1.50 equates to 5%. 5% is the DAILY interest, you multiply the daily by 365 days in a year, you get your APR (hence, “annual” percentage rate). That equates to a much larger APR. Now the result will be significantly off because I did not figure out compounding the interest, nor did I round as well as the poster did. But you get the general idea….. 10 cents vs $1.50 is a big difference in APR when you are calculating the same balance.

I have been dealing with Discover Card for years with a five digit available credit which I keep at 0 balance. In the past I have used the O% balance transfer option and used my card for gas etc. I was never charged the minimum interest charge fee until this month and so I got very upset, and the agent could not explain to my satisfaction why. So I paid off balance transfer and my current card balance and am thinking about trashing the card. I must say that Discover HAS a great program for people who have lost their jobs etc which allows you to hang on to your card and arrange payments you can afford to clear your balances……SOOO pretty good company anyway.

Those programs are a hoax, they close your account until you get it all paid off and then you have to apply to open a new account so they have to check your credit again and it doesn’t matter what your credit was the account is still closed do not do that just pay the minimum payment!
DISCOVER

i just got a bill from bank of america for 1.50 intreast even i have a 0 balance in my account i deleted and canceled my account and card i would not recommend nobody to get a BOA cardm

Yes, BOA chaged me $1.50 a month on purchases when I pay off my balance every month in full. I have cancelled that credit card today.

I had a neg balance on Bank Of America of about 3.00. A charge made it -.17, then the charged me 1.50 (haven’t called yet)

ya, boa is charging me the 1.50 rate also. how can you do that? how can you change interest on 0?

I have a credit card with Bank of America that I only use for small purchases online and ALWAYS pay it off in full within 5 to 10 days after it’s posted so my statements always show a zero balance. Last week I charged $2.95 and today I went online to pay it off and noticed an interest charge of $1.50 added — for a bill that isn’t even due until April 12th! I called B of A and they removed it immediately but wouldn’t tell me why it was even charged to my account in the first place so beware! Most people have higher balances and might now even notice a small $1.50 charge but can you imagine how much money they would make if they did this to all of their customers?!

I’m getting hit with a $2.00 minimum interest charge on a Macy’s American Express Card with a zero balance.

Yeah i have a zero balance on my card and still got hit, how can you put interest on a ZERO?? they should be giving me money back.

Oh its USBANK too

Seems people are being charged with the minimum interest charge fee of 1.50 – 2.00 even with a ZERO balance.

well in 7-12-14 2 years from the time you posted your comment they are still doing it i hust deleted and canceled my card over a 1.50 charge when i got a 0 balance