How Do Credit Card Issuers Calculate Minimum Payments? – Forbes Advisor

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Your credit card bill arrives and you see your monthly minimum payment, but may wonder how that number was determined. How minimum monthly payments are calculated varies from issuer to issuer. Some charge a flat percentage of a cardholder’s balance while others may incorporate interest and fees from the prior period. Every issuer’s card terms should say how they calculate the minimum payment. Cardholders should pay off the full account balance on time every month in order to avoid interest charges and keep credit utilization low. While only a minimum payment is required to stay in good standing, paying a full balance avoids accruing interest.

What Is a Minimum Payment?

A minimum monthly payment is essentially the lowest amount a card issuer will accept for the statement period’s ending balance. It’s due every month and shows up on a monthly statement. Making the minimum payment every month will keep a cardholder’s account in good standing.

If a cardholder tends to keep a balance from month to month, making only the minimum payment will provide more time to pay it off, but will also cause the total interest amount paid to be higher due to charges. If the cardholder has a zero balance on a credit card that’s used sparingly, there won’t be a minimum balance.

Keep in mind the minimum payment is often not equal to the total balance due to the issuer. Making only the minimum payment and continuing to make purchases may lead to a faster-accruing interest debt, which will make it more difficult to pay off the entire balance on the card. A cardholder’s credit score could also be negatively affected in this situation.

Where Is the Minimum Payment Located?

Cardholders can find their required minimum payments on their paper statements or in their online accounts. A cardholder can also call the number on the back of a card to inquire about the amount due and to make a payment.

Cardholders who carry balances should read their statements carefully. Thanks to the CARD Act of 2009, card issuers are required to provide cardholders information that shows them how long it will take to pay off a current balance with the current interest rate if only the minimum payment is made. This can help cardholders set up payment plans.

A minimum payment can change from month to month depending on the current balance and any interest or fees. Always check the total amount due on each month’s statement before making a payment and, if possible, pay down as much of the full amount as possible.

How Are Minimum Payments Calculated?

Minimum payment calculation strategies vary from issuer to issuer. Ultimately, many of the calculations used depend on the cardholder’s current balance and interest rate. Read the card’s terms and conditions to find out exactly how a card’s minimum payment is calculated.

There are three main ways minimum payments are often calculated:

  • A flat percentage of the cardholder’s balance. This rate may be a few percentage points of the total balance. In this case, the minimum payment will vary based on the size of the balance.
  • A percentage of the cardholder’s balance plus interest or fees from the prior period. Here the card issuer may charge 1% of the balance plus the cost of any interest or fees charged for the last statement period.
  • A flat rate. The card issuer may charge a simple flat rate as low as $35 due every month (as long as the balance isn’t above a certain threshold). If the balance is below a certain threshold, the minimum payment will be the entire balance.

A card issuer may employ one or more of these calculation methods depending on the cardholder’s standing and whether interest has been accrued or late payment fees incurred.

Does the minimum payment ever change?

The minimum payment can change depending on the cardholder’s standing, the size of the balance and whether the account has incurred interest or fees.

Missing a payment or paying less than the minimum can result in a late fee. Frequent missed payments may lead the issuer to raise the cardholder’s APR, which could result in a higher minimum payment. A higher balance due to missed payments can also raise the minimum payment required. Missed payments will also have a negative impact on credit score.

A cardholder may not see a change right away if carrying a balance and paying the minimum, if continuing to accrue interest while continuing to make charges, an increase in the minimum monthly payment is likely. If the cardholder stops making charges and focuses only on paying off the balance, a lower minimum amount will be due each month as the balance is paid down. The balance can be paid down much faster by paying more than the monthly minimum.

Ideally, a balance is paid in full every month before the due date. This isn’t always possible, of course, but paying at least more than the minimum—and as close to the full amount as possible—will help the cardholder pay off a card faster and may help a cardholder see a lower minimum payment over time and pay less in interest. Less interest on a smaller balance means a smaller minimum payment.

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Bottom Line

Minimum monthly payments depend on the cardholder’s current balance and interest rate. Cardholders can check their card’s terms and conditions to learn how a card issuer calculates a minimum monthly payment. Issuers may have a primary calculation and a secondary calculation depending on the cardholder’s standing, accrued interest and fees. Ideally, cardholders should pay off their full balance every month. If that’s not possible, pay more than the minimum and as much of the balance as possible and cease charging the card until the balance is paid off.

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