How Are Credit Card Minimum Payments Calculated?

The minimum payment on a credit card represents the smallest amount you are expected to pay each month.

Each card company determines its own minimum payment and calculates it in different ways depending on the status of your bill.

Paying the minimum keeps your account in good standing. However, if you only make a minimum payment, the card company will increase the interest it charges, and that can add to your balance in a hurry.

Anyone who only makes the monthly minimum payment on credit cards risks a serious debt situation. Those who pay less than the minimum or miss a payment entirely will see their credit score drop and have late fees added to the bill.

All monthly statements detail the minimum payment required for your card. It will also have a warning box detailing how long it would take to pay off the balance by making only minimum payments.

Understanding minimum payments and how they are calculated is an important part of owning a credit card.

What Are Minimum Payments?

A minimum payment is the least you are expected to pay on your monthly credit card bill. These are calculated in these ways:

• The higher flat rate is based on a percentage (between 2% and 4%) of what is owed, or a flat charge set by the credit card company ($25-$40).
• A percentage of the balance (typically 1%) plus interest and fees.

Every credit card company determines the formula it uses for the minimum amount it requires. The process is not simple, and that could be by design. Those who aren’t familiar may be inclined to make more purchases, which, if not paid in full each month, only benefits the credit card companies.

Knowing how to determine minimum payments can be helpful to anticipate how much to set aside each month for the bills.

How to Find Minimum Payments

Minimum payments and balances can be found on your monthly statement. For those with paper statements, the information will be stated clearly.

Online, information is listed on the credit card website or on an app on your phone or tablet.

For example, a statement from Chase Bank illustrates the new balance due ($880.93), the minimum payment due ($40) and the date it is due. A box at the bottom shows that if only minimum payments are made, it will take two years to pay off this amount and will cost a total of $1,112 – or $231.07 more than the charged items.

The ”minimum payment warning” provides the clearest explanation for how much more money you will pay by only making minimum payments.

While many of us no longer use printed statements, it’s important to check them if you are carrying a balance. The clear explanation of the consequences of making only minimum payments is important to understand. The fine print on this account shows that missing the minimum payment will lead to a late fee of up to $40, plus a possible penalty that raises your interest rate to 29.99%.

Even if you don’t have statements mailed to you, you can find a copy of the statement on your online account. These statements include the total amount owed, your interest rate and how long it will take to become debt-free on the account.

Calculating Minimum Payments on Credit Cards

Minimum payments are calculated based on monthly credit card balances and added fees and interest charges, if you have not paid the card in full.

Let’s look at an example.

Assume your credit card had a zero balance and you charged a family dinner that cost $150. The first minimum payment required would be the percentage of the balance. For our purposes, let’s estimate the highest percentage: 4%. That means a minimum of $6.

In this instance, the credit card would default to the $25-$35 charge it sets. Let’s say $25, which you pay, leaving a balance of $125 on next month’s bill.

The next month, the payment would include the $125 carried over, plus any new charges. Let’s imagine you added an $800 charge for a car repair. That means your bill would include the $125 carried plus the $800 – so $925. Interest then would be charged and added to the balance.

The average credit card interest rate is 22.8%. Divided by 12, that is 1.9% per month. In our scenario, another $17.58 is added to the bill (925 x .019 = 17.58), making the total $942.58.

In this scenario, you are not even breaking even by making a minimum payment.

It can all seem overwhelming. One helpful way to find a solution to eliminate debt would be via Debt.org’s debt payoff calculator. This calculator helps you determine the best timeline to pay your debt, and provides very valuable information about the impact of increasing monthly payments with the goal of moving you toward eliminating debt.

Common Methods of Calculating Minimum Payment Amounts

Minimum payments for credit card bills are typically calculated in three ways:

• The flat fee of $25 or $35 is the minimum payment. This approach does not depend on percentages. If you owe less than the required minimum, you must pay the entire bill.
• The flat percentage, typically 1%-3% of the balance due. If you owe $2,000, the minimum payment at 2% would be $40, and at 3% would be $60. Many card companies that use this formula require the minimum to be higher than the flat fee.
• If you haven’t made full payment or are late with a payment, card companies charge a percentage, then add fees and interest. If you owe $2,000 and only pay $20 of the $40 minimum, the next month’s balance would be $1,980. If you make no purchases with that card the next month, card companies typically charge 1% of the balance before interest and fees, which in this example would be $19.80. Then they add interest of $37.62 (1.9% of the balance of $1,980) and a penalty fee (let’s say it’s $35) for not paying the minimum. That takes your balance owed to $2037.42, and the minimum payment jumps to $92.42.

This quick primer illustrates how making only minimum payments leads to increasing costs.

How Making Only Minimum Payments Impacts Your Finances

Only paying the minimum balance on your credit card bill has several negative effects on your financial situation, including increased interest charges and damage to your credit score.

The major factor in a credit score is a reliable history of regular payments. Making only minimum payments does not show a reliable history. In addition, the longer a credit card balance carries forward with interest, the more it uses your available credit. This is called credit utilization and is the second biggest factor in a credit score. Below 30% credit utilization is considered good, and below 10% is excellent.

While making a minimum payment in any one month may not be damaging, continuing to do so will be very damaging. Unpaid balances accrue interest and could lead to fees and past-due penalties.

A minimum payment on debt of $3,000 would take 57 months to pay and lead to more than $1,900 in interest charges. Adding $100 to that minimum payment reduces the time to pay the bill by one year and lowers interest charges by $440.

If you have that same balance of $3,000 and pay $200 per month, you can pay the balance in 18 months, but would pay $564.73 in interest.

You can see how easily – and quickly! – You can find yourself in less-than-ideal financial straits. A medical bill, major home or car repair, or a job loss can make things tough. But when it comes to credit cards, it’s always best to pay each month, in full and on time.

If you can’t, the next best option is to pay the amount due as soon as possible to minimize interest charges and lower the risk of spiraling debt.

Will Minimum Payment Balances Ever Change?

The minimum payment can change monthly depending on interest charges, outstanding debt, and fees you may incur.

A missed payment, for example, will lead to a penalty charge and interest on the entire balance due. Fees may also be charged; credit card companies let you know about that via letter, usually in the fine print. They can also increase your interest rate as a penalty if you do not pay.

Minimum balances can also go down. This requires making regular and significant payments on the outstanding balance. The minimum is the least you can do. Paying the most you can afford will help reduce debt, total interest, and credit utilization. Paying $500 on a $3,000 bill will pay off the entire balance, including interest, in seven months.

When it comes to eliminating credit card debt, the more you can afford, the more you should pay.

Can You Pay Less Than the Minimum Payment?

You can pay less than the minimum, but there are painful consequences.

Paying less than the minimum leads to penalties and fees and damage to the credit score. None of these financial consequences is good.

It’s just as serious to pay less than the minimum as it is to skip the payment completely. The credit card company will impose a late fee. If you continue paying less than the minimum, it could lead to a penalty interest rate. Our earlier example from Chase had a maximum penalty rate of just about 30%.

If you stop payments for six months, most companies will sell your account to a debt collection agency.

Because late fees and interest are added to an unpaid balance, paying less than the minimum is a good way to lead yourself into the maze of debt, where your amount owed becomes larger than the original balance. This leads to being financially unable to escape the maze.

None of this will help credit scores. As we said, reliability on payments and credit utilization are the biggest factors in a credit score. Both suffer when you regularly do not make at least the minimum payment.

If you can’t pay the minimum payments, it’s wise to contact the credit company and honestly explain the problem. Most card companies don’t want to lose your business and will help find a way for you to handle the debt.

Another option might be to speak with a nonprofit credit counselor, who will assess your situation and offer a solution. One may be a debt management program where the company would work with creditors to reduce your interest rates and pay off credit card and other debts in 3-5 years.

Why You Should Pay More Than the Minimum Payments

The warning Chase puts on its statement is tepid but clear: “If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance.”

The best way to handle credit card debt is to pay the entire amount due, in full and on time. If hardship or other financial challenges make that impossible, it’s best to pay more than the minimum, preferably as much as you can afford. The more you pay, the sooner the debt is erased.

While paying the minimum is better than not paying anything, you are hurting yourself in the long run by not paying off the debt as fast as you can. Interest charges and fees added to the card balance only make repaying that much more difficult.

These charges compound – meaning you pay interest on the interest – and add up quickly, leading to mental and financial stress. In some cases, the charges are so onerous that you wind up paying more than the original bill.

All of this highlights the hazards of the minimum balance. It’s tempting to make only the minimum payment, but doing so leads to spiraling debt that damages your financial and mental well-being, along with your credit score.