How Do Credit Card Companies Calculate the Minimum Payment?

How Do Credit Card Companies Calculate the Minimum Payment?

When people get their first credit cards, one of the most frequently asked questions is "How do credit cards calculate the minimum payment?" This is the amount of money you have to pay if you have a balance on your account. It will change from month to month based on the amount of the balance, your interest rate and the fees associated with your card. Predicting what it will be can be a little difficult.

There are several ways that credit card companies go about setting a minimum payment. It may be advisable for you to check with your company to determine how the minimum payment on your specific card will be determined. Here is an overview of some of the ways credit card companies calculate minimum payments.

Percentages

In many cases, a credit card company will charge a percentage of the balance on the card as the minimum monthly payment. If you have a $1,000 balance and a 2% minimum, you will owe at least $20 for the month. Part of that money will go toward interest, and a tiny portion of it will go towards your principle. If you didn't charge anything more on your account, then you may only have to make a $19.95 minimum the next month.

This percentage is subject to change at any time based on adjustments with your credit card company. You can try to predict what you owe on a regular basis, but it is best to look at your credit card statement just to be sure. If your percentage went from 2% to 4%, you will need to be prepared to pay more money.

Interest

With some credit cards, all you are required to pay for the month is the interest that is on the card. Let's say your balance is $1,000 and your APR is 12%. Since that is your annual percentage rate, you can assume that approximately 1/12 of it is what you will pay in interest each month. Thus, you would owe 1% of your balance for the month, which would be $10. The higher the APR, the more you will have to pay.

Note that if you are simply paying the interest, you are not doing anything for the balance on your card. You will carry that balance until you start making extra payments. Some credit cards offset that by charging the interest plus 1% of the balance. The extra 1% goes toward your principle. You will still have to pay on the card for a long time to deplete the entire balance, but at least you are taking a step in the right direction.

Fixed Payments

Very few credit cards will charge a fixed minimum each month. However, nearly every issuer has established an absolute minimum you must pay each month. If your minimum payment calculation results in an amount below the absolute minimum payment, you will be required to pay the absolute minimum. The only time a minimum payment like this will not be applicable is if your overall balance is less than that. If you only owe $10 on the card, that is all you will have to pay. You can find out your absolute minimum by reading through the terms and conditions of your credit card.

Setting Your Own Minimum

Once you know how much the credit card company expects you to pay, you should raise the bar for yourself. It's time to create your own minimum so you can get your balance paid down as quickly as possible. It may take you years to get rid of your bills if all you pay is your minimum every month. If you manage to pay as much as you can, you'll get out of debt much faster.

Try to set a goal for yourself to save or pay a certain amount on your card every week. If you get paid every two weeks, take money out of each paycheck to pay down your balance. Think of these extra payments as a bill with a set due date, not just something that you can pay "whenever". An extra $50 extra every two weeks will make a huge difference in your credit card balance. That's $1,300 a year! Once your scheduled minimum payment is complete, everything else you pay on your card is going to pay off the balance you owe. You need to take advantage of that.

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