Credit Card Minimum Payment Calculation
If you pay attention to your credit card billing statement each month, you've probably noticed that your minimum payment—the amount you must pay to avoid being penalized—can change from one month to the next. That’s because it’s typically calculated as a percentage of your outstanding balance plus any fees. So the higher your balance, the higher your minimum payment will be.
While it’s always best to pay more than the minimum required, you should understand how the minimum is calculated and what happens if you don’t pay it. Credit card issuers use different methods, but there are some general principles that apply. Here’s what you need to know:
Aim to pay your monthly balance in full to avoid interest charges. If you can’t, paying more than your minimum will help you mitigate the effect of compound interest.
Methods of Calculating
Method 1: Percent of the Balance + Finance Charge
Some issuers calculate the minimum payment as a percentage of the balance at the end of the billing cycle, plus a monthly finance charge. So, for example, 1% of your balance plus the interest that has accrued. Let’s say your balance is $1,000 and your annual percentage rate (APR) is 24%. Your minimum payment would be 1%—$10—plus your monthly finance charge—$20—for a total minimum payment of $30.
Method 2: Percent of the Balance
Some credit card issuers calculate the minimum payment as a straight percentage of the balance at the end of your billing cycle. This percentage is likely to be higher than in the above scenario, maybe between 2% and 5%, and it will be applied toward both your principal and interest charges. So again, if you had a $1,000 balance and your minimum payment was calculated at 2% of that balance, it would be $20.
Some issuers use both of these methods, determining the amount based on the higher of the two. And in many cases, any of these methods can be combined with a floor amount. If the calculation the issuer uses yields an amount less than say, $25 or $35, the floor kicks in instead.
Penalty fees like late fees, as well as past due amounts, will typically be added into the calculation. This would increase your minimum payment significantly.
One other caveat: If you’ve exceeded your credit limit, your issuer may add that to your minimum payment. For example, if your balance is $1,050 and your credit limit is $1,000, your minimum payment may be 2% of the balance—$21— plus the $50 from being over the limit, for a total of $71.
How to Find Out How Yours Is Calculated
You can find out which method your credit card issuer uses by reading your credit card agreement. Look for a section titled "How your minimum payment is calculated" or "Making payments." A customer service representative can also help you.
When Your Minimum Payment May Be Your Full Balance
There are some instances when your issuer may require you to pay your balance in full:
- If your account is charged off, you'll no longer have the luxury of making monthly payments and your credit card issuer will demand the full balance.
- If you have a charge card, your minimum payment is the full balance on the credit card. By nature, charge cards don't allow you to carry a credit card balance from month to month, so you're not allowed to pay just a portion of the balance each month.
- If your balance is below a certain amount, like $25, your minimum payment may be the full balance.
Reasons Your Minimum Payment May Increase
Besides an increase in your balance, there are a few other reasons your minimum payment could increase from one month to the next:
- You were late on a previous payment.
- You're over your credit limit.
- Your interest rate, or APR, has increased.
- The credit card issuer changed the percentage used in the calculation, either as a company principle or because you pose a bigger credit risk.
Making Your Minimum Payment
The minimum payment must be paid by the cutoff time on the payment due date. For most credit cards, the cutoff time for your minimum payment is 5 p.m. Some credit card issuers extend the cutoff time to later in the day. Check with your credit card issuer to find the exact time. Make sure you give yourself enough time to get it in on time.
Your credit card issuer will give you a few options for making your minimum payment by mail, online, or other the phone.
- If you mail your payment, you can send a check or money order.
- If you make a payment online or over the phone, you'll be able to supply your checking account and routing number to make an electronic payment.
You can't use another credit card to make your minimum payment.
What Happens If You Miss Your Minimum Payment
If you miss your monthly minimum payment or you pay less than the minimum, your credit card issuer can charge you a late fee. Missing the minimum payment can also mean you forfeit any promotional interest rate you have on your balance. After you miss two minimum payments in a row, your credit card issuer may raise your interest rate to the penalty rate.
After your minimum payment is more than 30 days late, the credit card issuer will report the late payment to the credit bureaus. This late payment will go on your credit report and remain for seven years. Your credit score might also be impacted, especially in the first few months after the late payment is added.
Previously missed payments will raise the current minimum payment due. Not only will you be required to make the current and missed minimum payments, but a late fee will also be added to the amount you need to pay to get your account back in good standing. Because the minimum payment rises with each missed payment, it gets harder and harder to catch up on your payments.
Paying More Than the Minimum
You can and should pay more than the minimum, if at all possible. Paying only the minimum is the most expensive way to pay off your credit card balance. It takes the longest amount of time, and you'll pay more interest by the time you completely repay your balance. In fact, if you're making the minimum payment yet continuing to make purchases each month, your balance will grow instead of shrink. This is one of the fastest ways to get yourself into debt.