How Is Your Credit Card Minimum Payment Calculated?

Your monthly credit card statement will usually tell you what your total minimum payment is for the previous payment period. If you fail to make that minimum payment, you may be charged a late fee and be forced to pay an interest rate penalty. If you fail to pay it for 30 days or more your account may be reported as delinquent, which can damage your credit. You should always make at least the minimum payment on time, and you should try to pay more than the minimum whenever possible.

Your minimum payment will change from month to month, which can make budgeting difficult. Understanding how your minimum payment is computed can help you anticipate what your minimum payment is likely to be and prepare an appropriate budget.

What Is Your Minimum Payment?

Your minimum payment is the smallest payment you can make every month without being considered late or delinquent. The minimum payment is usually much smaller than the total balance you owe. 

If you pay your entire balance before the due date each month, you will pay no interest on that balance. If you pay less than the full amount, the unpaid balance will carry over to your next statement and will accrue interest. If you make only the minimum payment that balance may be large, and the interest can become substantial. 

Your minimum payment may vary widely from month to month. It is based on your current balance and your interest rate and may include charges carried over from the previous month. 

How is Your Minimum Payment Calculated?

Minimum balances are calculated in different ways by different credit card issuers. The specific formula used by your issuer will be described in your credit card agreement. Most card issuers have their credit card agreements online, and it’s included in the documents you received when you got your card. You can obtain a copy by calling the customer service number on the back of your card. 

Most calculations are based on similar formulas, with minor variations. Your issuer will probably have a minimum floor rate for your monthly payment that you will always pay outside of fees or interest. If your balance is below this rate, your minimum payment will be your entire balance. 

If your balance exceeds the floor rate, most issuers will use one of two basic methods to calculate your minimum payment: 

  • Some issuers, particularly credit unions and subprime card issuers, will use a flat percentage of your balance as the minimum payment. This fee is often but not always 2% and can be up to 4%. 
  • Other issuers may use a smaller percentage of your balance, often 1%, and then add on all the accrued interest and fees from the statement period. This method is often used by large card issuers. 

Issuers may also add fees and penalties to your minimum balance. These charges often include the following charges (but may include others): 

  • Past Due Payments 
  • Charges Exceeding Your Credit Limit 
  • Penalty Fees 

You will not be charged a percentage of these costs. They will be added to your minimum payment in full. These charges can increase your minimum payment dramatically. 

How Can I Predict My Next Minimum Payment?

If you’re budgeting your money it can be useful to have an estimate of what your next minimum payment will be. 

There are steps you can follow to reach this estimate: 

  • Know your billing cycle. The billing cycle may not be from the beginning of the month to the end. Different cards have different billing cycles and you will need to know yours to estimate your minimum payment. 
  • Check your credit card agreement and see what formula your issuer uses to calculate your minimum payment. 
  • Check your current balance. Most issuers will allow you to do this online or by phone. If you have an online account with your issuer you can view your current account status, which will also let you see any late fees or amounts carried over from your last bill. 
  • Estimate what you will spend on your card for the rest of the statement period.
  • When you have estimated what your total balance will be at the end of the billing cycle, apply the issuer’s formula for computing the minimum payment.

It may be difficult to accurately compute interest charges, which are often calculated and compounded daily. Your previous statements can give you a basis for estimating interest charges.

You may not be able to predict your minimum payment exactly, but you should be able to arrive at a close enough estimate to help you budget. Try to budget more than your estimate. You’ll have a margin for safety and it’s always better to pay more than the minimum if you can.

When your credit card statement arrives, check your minimum payment immediately. It will be listed on your statement. You will generally have at least 21 days to pay that minimum and keep from paying late fees. 

Why You Should Always Pay More Than the Minimum

Your minimum payment is usually a small part of your total balance. Credit card issuers are expected to keep minimum payments higher than the rate at which the account accrues interest, but minimum payment rates are often only slightly above this level. 

Making the minimum payment will avoid late fees or delinquency and keep your account current. This can be useful if you are in a period of financial stress and cannot afford to pay more than the minimum, but you will have to pay interest on the balance that you do not pay, and credit card debt carries high-interest rates. 

Your credit card statement must include a summary of how long it will take to pay off your balance if you make only the minimum payment each month. It will also tell you how much interest you will pay if you make only minimum payments. Note that this summary will only be accurate if you make no further charges on your card. 

If you keep making charges on your card while making only minimum payments your balance will rise quickly. This can affect your credit utilization, which is the percentage of your credit limit that you are using. If your balance goes above 30% of your limit your credit may be affected. If the percentage is higher the impact can be greater. 

Where Does Your Minimum Payment Go?

Your credit card balance may actually be a composite of several balances, each with different interest rates:

  • Your purchase balance is composed of charges for goods or services you have paid for with your card. This is the most common form of charge and will carry the stated APR for your card.
  • Balance transfers are balances you may have transferred from a different card. Some cards use a different interest rate for balance transfers.
  • Cash advance balances usually carry a higher APR than other balances, and there is no grace period. Your cash advance balance accrues interest from the day you draw it.

Federal law requires that any payment you make above the minimum must be applied to the balance with the highest interest rate. Paying more than the minimum will reduce those high-interest balances and save you money.

If you make only the minimum payment the issuer can apply it to any balance and will often apply it to the balance with the lowest interest rate. Those high-interest balances will still be there and will still be racking up interest. That’s another good reason to pay more than the minimum. 

Conclusion

Your minimum balance can change from month to month. Knowing how your minimum balance can help you be sure you’ve budgeted enough to pay it.

Your minimum balance can be a useful way to keep your account current and avoid penalties when you’re short of money, but you should try not to rely on it consistently. Repeatedly making minimum payments can get you into an uncontrollable spiral of credit card debt, especially if you keep making charges on your card.

Your goal should be to pay your balance in full every month. If you can’t do that, understanding minimum payments and how they work can help you manage your payments and get out of debt faster.

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