Methods for Calculating the Minimum Payment
There are several methods for calculating the minimum payment for a credit card, but there are some general principles that apply to all methods. Here’s what you need to know:
Method One: Percentage of Balance + Finance Charges
Some credit card issuers calculate the minimum payment as a percentage of the balance at the end of the billing cycle, plus the monthly finance charges. For example, if your balance is $1,000 and the annual interest rate is 24%, the minimum payment would be 1% – $10 – plus the monthly finance charges – $20 – making the total minimum payment $30.
Method Two: Percentage of Balance
Some credit card companies calculate the minimum payment as a direct percentage of the balance at the end of the billing cycle. This percentage is usually higher than the previous scenario, perhaps ranging from 2% to 5%, and it will be applied to the original balance and interest charges. For example, if your balance is $1,000 and the minimum payment is calculated at 2% of this balance, it would be $20.
Other Details
Some credit card issuers use both methods and determine the amount based on the higher of the two. In many cases, any of these methods can be combined with a minimum amount. If the calculations used by the issuer result in an amount less than, say, $25 or $35, the minimum amount will be used instead.
How to Find Out How Your Minimum Payment is Calculated
You can find out what method your credit card company uses by reading your credit card agreement. Look for a section titled “How Minimum Payments Are Calculated” or “Payment Procedures.” A customer service representative can also help you with this.
When Minimum Payment May Be the Full Balance
There are some situations where your credit card company may require you to pay the full balance. For example:
- If your account is closed, you will no longer be able to make monthly payments, and the credit card issuer will request the full balance.
- If you have a charge card, the minimum payment will be the full balance on the credit card. Naturally, charge cards do not allow carrying a credit card balance from month to month, so you are not allowed to pay only part of the balance each month.
- If your balance is below a certain amount, such as $25, the minimum payment may be the full balance.
Reasons Minimum Payment May Increase
In addition to an increasing balance, there are a few other reasons that may cause the minimum payment to increase from month to month:
- Your previous minimum payment was late.
- You exceeded your credit limit.
- Your annual percentage rate or APR has increased.
- The credit card company changed the percentage used in the calculation, either based on company policy or due to increased credit risk on your part.
How to Make the Minimum Payment
The minimum payment must be made before the payment due date. For most credit cards, the minimum payment deadline is 5 PM. Some credit card companies may extend the minimum payment deadline to a later time in the day. Check with your credit card company for the exact time. Make sure you give yourself enough time to complete the payment on time.
Your credit card company will provide you with several options to make the minimum payment, whether by mail, online, or by phone. If you are sending the payment by mail, you can send a check or money order. If you are paying the minimum payment online or by phone, you will be able to provide your checking account number and routing number to make an electronic payment.
What
What Happens if You Skip the Minimum Payment
If you skip your monthly minimum payment or pay less than the minimum amount, the credit card company may impose late fees. Skipping the minimum payment can also mean losing any promotional interest rate you have on the balance. After skipping two minimum payments in a row, the credit card company may raise your interest rate to a penalty rate.
Once the minimum payment is more than 30 days late, the credit card company will report the late payment to credit bureaus. This late payment will be listed on your credit report and will remain for seven years. Your credit score may also be impacted, especially in the months following the addition of the late payment.
Delinquency on previous payments will increase your current minimum payment due. You will not only be required to pay the current minimum payment and any previous minimum payments, but late fees will also be added to the amount you need to pay to restore your account to good standing. Since the minimum payment increases with each late payment, it becomes harder for you to catch up on your payments.
Paying More than the Minimum Payment
You can and should pay more than the minimum payment if possible. Paying just the minimum is the most expensive way to pay off your credit card balance. It takes longer, and you will pay more interest by the time you pay off your balance completely. In fact, if you are making the minimum payment and still making purchases every month, your balance will increase instead of decrease. This is one of the quickest ways to fall into debt.
Frequently Asked Questions
What happens if I only make the minimum payment on my credit card statement?
If you only make the minimum payment and leave a balance on your card at the end of the billing cycle, interest will be charged on that balance. The average interest rate for credit cards is about 20%, meaning any debt left after the minimum payment will grow at 20%. Some cards may have a grace period when you don’t pay your statement balance in full, so any new charges may start accruing interest immediately.
How can you reduce the minimum payment?
While you have some flexibility in negotiating a lower interest rate, you likely have little room when it comes to minimum payments. The best way to reduce minimum payments is to pay down debt and keep your credit utilization low.
Source: Capital One. “Credit Card Minimum Payments Explained.” Experian. “How Is Your Credit Card Minimum Payment Calculated?” Citibank. “Card Agreement Guide.” Page 6. Equifax. “What Is a Charge-Off?” American Express. “Understanding the Differences Between Charge and Credit Cards.” Consumer Financial Protection Bureau. “Why Did My Credit Card Issuer Increase My Late Payment Fee?”
Source: https://www.thebalancemoney.com/credit-card-minimum-payment-calculation-960238
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