What is the Minimum Payment on a Credit Card and How to Calculate It?

Credit cards make financial life much easier because they only require a minimum payment, typically 1-5% of the monthly balance. So instead of skipping the payment during the crisis, you can opt to pay the minimum payment on credit cards to maintain a good record.

This article will walk you through the concept of the minimum payment, its effects on FICO records, and how minimum payment on a credit card is calculated.

Let’s dive right into it!

What is the Minimum Payment on a Credit Card?

The minimum payment is the least amount cardholders are supposed to pay before the last date of the billing cycle to keep up a good record. It is generally a fraction of your total balance and ranges within 1-5% depending on the card issuer’s policies. 

Well, it is tempting to pay less every month, but it can cost you a lot if you keep doing so for a long time. Experts suggest making payments in full each month, especially when you are using a credit card to build credit. You should only make credit card minimum payments in an emergency. 

How to Calculate Minimum Payment on Credit Cards?

The companies calculate minimum credit card payments based on a flat percentage of the total balance. However, it varies by company, as some issuers may add your previous due balance and additional penalty charges. You must read the terms and conditions of the card issuer carefully. 

If you do not need to pay any extra charges other than the minimum payment, here’s how you can calculate. Let’s say you have an outstanding bill of $2000 and the issuer charges 5% of the total amount. The minimum amount will be $2000 x 0.05 = $100. 

Formula: Total Amount X Flat Percentage = Credit Card Minimum Payment

In case of multiple fees, suppose your outstanding balance of this month is $2000, you have accrued $100 in interest, the minimum credit percentage is 2%, and the late payment fee is $30.

Here’s how the minimum payment is calculated:

• $2000 X 0.02 = $40

• $40 + $100 + $30 = $170 is the minimum payment you owe the credit company.

Formula:  

• Total Amount X Flat Percentage = Current Payment Amount 
• Current Payment Amount + Accrued Interest + (Late Fees and Other Charges) = Minimum Payment Amount for the Month 

So these are the two methods that credit issuers use to calculate minimum payments.

Factors Affecting Credit Card Minimum Payment 

The minimum monthly payment of your credit card is subject to change depending on various factors. Let’s discuss them here.

Credit Utilization Ratio 

The credit utilization rate is the percentage of credit that consumers use compared to the total amount available to them. According to Equifax and other credit bureaus, ideally, this ratio should be below 30%.

Making big purchases or payments can spike up your credit ratio, which results in impacting your minimum monthly payment on your credit card.

Paying Minimum Amount for a Long Time 

Paying a minimum balance can keep your credit in good standing. However, if you continue to do so for an extended period, you may end up in financial trouble. 

The card issuer will charge multiple charges and accrue interest over the total outstanding balance. All of this can disturb your foundation of finance, as the company will increase your minimum credit card payment, which can throw you into the circle of debt.

Missing or Paying Less than Minimum Payment 

If you pay less than the minimum amount or fail to pay at all, you may face multiple charges, such as a late penalty plus interest on the total amount owed. Your issuer might evaluate your position and increase your credit card minimum payment.

Upon missing or not paying a sufficient amount, your card issuer may also increase your Annual Percentage Ratio, which can be costly. Additionally, it will directly reflect on your FICO score, as the companies send reports to credit bureaus and the statement stays for around 7 years.

Where to Find the Minimum Payment on Credit Cards?

This information will be available before the billing cycle, once your issuer has calculated the monthly balance. To know your card’s minimum payment, you can:

• Check online in your card balance and details.
• Read the credit card fine print that you received in your mail. 
• Check out the monthly statements of your credit card. 

If you fail to locate or calculate minimum credit card payments, you must reach out to the customer department of the issuer and learn about the details.

How to Reduce Credit Card Minimum Payment?

The high minimum payment on credit cards can strain your budget, especially if you are already paying off debt. Fortunately, there are a few things you can do to lower the amount.

• Minimize purchasing with credit cards and try to make on-time payments.
• Sign up for a debt relief program that helps to put off some debt. Example: Debt avalanche or debt forgiveness.
• Taking a debt consolidation loan to pay off the credit debt at lower charges. 
• Transfer your balance to any new credit card with an intro or interest-free offer.
• Talk to your lender about your situation and ask them for an interest-free or lower payment amount.

These are some suggestions to help you reduce your credit card minimum payable amount. 

The Effect of Making Only Minimum Payments

While it is crucial to make at least the minimum payment, carrying a balance from month to month is not recommended because you will accrue interest charges if you are not under an intro 0% APR.

Card issuers include a “minimum payment warning” on each billing statement under the Credit CARD Act of 2009. The table even shows you the overall time it will take to pay off your balance and the total amount you will end up paying (including interest) if you pay only the minimum.

The major disadvantage of paying the minimum payment instead of the entire credit card balance is that you won’t be eligible for any interest-free credit period. Moreover, you will be charged interest starting from the date of purchase.

This interest rate will continue to accrue until you pay the outstanding balance. So, whether you have paid the minimum payment amount and avoided all the late penalties, you will still not be able to benefit from the interest-free credit term.

Bottom Line: Pay More Than the Minimum 

We feel an itch when the bank account shows a debit of a big sum towards the credit bill, so we get tempted to pay the minimum to escape the big hit. 

But you know what’s the truth? The less you pay now, the more you will have to pay later.  

So, if you are in financial distress, limit your credit purchases, and try to make more than the minimum payment to pay off the debt. If you do the same multiple times within every billing cycle, the issuer will lower your interest rate and even waive some fees. 

The bottom line is, that you must cut off extra expenses and pay more than the minimum payment on a credit card to maintain your personal financial well-being. 

Read Next: Credit Card Standard Size, Weight, Material, and Dimensions

Frequently Asked Questions 

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