How Credit Card Issuers Calculate Minimum Payments
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When you tend to carry a large, fluctuating credit card balance, figuring out your minimum payment feels like a guessing game you can't win: “How much is it going to be this month?”
In general, the way your card issuer calculates your minimum payment depends on how much you owe. Typically, the minimum payment is a small calculated amount of your balance or a fixed dollar value — whichever's greater. As a rule of thumb:
If you owe a lot (usually, over $1,000): Your minimum will be calculated based on your balance. “It’s usually about 2% of the balance,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. The exact formula varies by card. More on that later.
If you owe some (usually, between $25 and $1,000): Your minimum will probably be a fixed dollar amount, often $25, but it can vary by card. Every card has a fixed floor rate for minimum payments. If the calculation used to determine your minimum comes out to be less than that floor rate, you pay the fixed amount.
If you owe very little (usually, less than $25): Your minimum will be the full balance. For instance, if you owe $10, and the fixed floor rate is $25, your minimum payment will likely be $10.
If your minimum payments seem impossibly unpredictable, you’re probably paying the first type of minimum payment — the calculated amount. Understanding the math behind that number can make it easier to predict next month’s bill.
How minimum payments are calculated
A minimum payment is exactly what it sounds like: It’s the bare minimum you’re contractually obligated to pay each billing cycle. If you don't pay at least the minimum by the due date, you could be hit with a late fee and penalty APR, or annual percentage rate. After 30 days without paying at least the minimum, your account can be reported delinquent and your credit score could also take a hit.
"The minimum is really useful if people are a little short of income in a particular month — for example, when they’re in between jobs or they recently had a large expense," says Nessa Feddis, senior vice president for consumer protection and payments at the industry group American Bankers Association. "But it’s not something that should be routine."
In part, that's because the minimum is usually so low that it just barely exceeds the interest charges that accrue each month on your balance. When you're just paying the minimum, it could take years — in some cases, decades — to pay off your full balance. Paying only the minimum could also send up red flags to other lenders, suggesting that you struggle to repay debts, Feddis adds.
Did you know? In the 1970s, minimum payments equal to 5% of the outstanding balance were the norm. Since then, issuers have reduced the payments — in part because lower minimum payments created more profitable accounts.
Assuming you owe enough that your calculated minimum payment exceeds your issuer's fixed floor rate, your minimum payment will probably be calculated in one of two ways:
Flat percentage
On some cards, issuers use a flat percentage — typically 2% — of your statement balance to determine your minimum. If your balance (including interest and fees) were $10,000, for example, you’d owe a minimum of $200.
This method is most often used by credit unions and subprime banks, according to a 2015 study by the Consumer Financial Protection Bureau.
Percentage + interest + fees
Some cards charge a lower flat percentage of your statement balance, excluding fees and interest — say, 1% — and then tack on all the interest charges and fees accrued that cycle. Suppose your balance (before interest and fees) is $10,000 and you’ve accrued $160 in interest and $38 in late fees. If your issuer calculates your minimum as 1% of the balance plus interest and fees, you’d have a minimum payment of $298.
You can calculate it in two steps:
$10,000 balance x 1% (0.01) = $100
$100 + $160 in total interest accrued + $38 in late fees = $298 owed as a minimum payment
This method is most commonly used by large issuers, according to the CFPB’s findings.
Other factors affecting minimums
When estimating next month's minimum, keep these factors in mind:
Overdue payments or over-the-limit balances can change the math. With either method, an issuer may add any amount of your balance that's already past due or over the card’s limit to your minimum payment.
“Billing cycles often don't start at the beginning of the month. Know when your billing cycle starts and ends before estimating.”
Billing cycles often don't start at the beginning of the month. Make sure you know when your billing cycle ends and begins before estimating. Your statement balance will differ depending on whether it begins on, say, the 11th of each month versus the 13th. If you’re unsure, call your issuer.
Why isn't your minimum smaller? Federal guidance directs issuers to avoid "negative amortization." That means that the minimum payment shouldn't be lower than the rate at which interest accrues.
Under this guidance, for example, issuers typically wouldn't offer a card with a 2% minimum payment and a 30% APR (2.5% per month). That's because if you paid the minimum on it, your payment would be lower than your interest charges. Your balance would continue to grow even if you didn't make new purchases. With today's minimums, by contrast, your balances will generally go down each month — though only slightly — assuming you don't make new purchases.
Where to find your card’s minimum
You’ll find information about how your issuer calculates your minimum payments in your cardholder agreement, which is available:
In the pamphlet you received in the mail when you got the card
Online, when you log into your account and view your card details
If you can’t find the information you need, call the customer service number on the back of your credit card, and a representative can fill you in on the details.
You can find out more about minimum payments by reading your credit card statement. By law, your issuer is required to include a “Minimum Payment Warning,” which discloses how long it would take to pay off your current debt if you paid only the minimum each month. Reviewing that warning might motivate you to pay off your debt faster.
It's best to pay more than the minimum
Paying just the minimum can feel like saving money because it means a much smaller hit to your checking account than paying the full balance would. But in fact, the less you pay now, the more you’ll pay later.
So, if you’re low on cash, how much should you put toward your balance?
“Honestly, you should pay as much as you can afford to pay without derailing your other financial obligations,” McClary of the NFCC says. Try to pay double the minimum payment, if you can afford it. If that’s a no-go, consider paying $10 or $20 more than the minimum, he suggests.
You can also make your monthly obligations more manageable by asking your issuer for a lower interest rate or moving your high-interest debt to a card with a 0% introductory APR on balance transfers. With some interest rate relief, your balance won't grow as quickly. That can make it easier to pay down your debt faster.
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