Neighborhood Credit Union

How are Minimum Payments Calculated?

Published August 1, 2018 

Man using laptop and woman holding credit card. Young couple shopping online with credit card at home

By Jordan Ottaway 

Every time you open your app or go online to make your credit card payment, you see the different options on how to make your payment. One of them is choosing to pay the minimum balance.

When I go to pay towards my credit card balance each month, my minimum payment is $25, so being the curious person I am, I wanted to do a little digging to see how card issuers come up with that number.

What is a minimum balance?

When you open and begin using a credit card, you’re basically taking out a loan from the card issuer. This is why you receive a bill for all the purchases you made throughout the billing period every month.

As with every loan, you have to pay back the amount you borrowed at a certain annual percentage rate (APR). Given your rate and the amount you owe, the smallest amount you can pay back each month is your minimum payment.

How is it calculated?

Generally, when card issuers calculate your minimum payment, it is dependent on how much you owe. Normally the amount is a small calculated amount or a fixed dollar amount—whichever is greater. For example:

  • If you owe a little, your minimum will usually be the full amount. If your balance is $15 and the fixed rate is $25, your minimum will usually be $15.
  • If you owe some ($20-$1,000), your minimum will sometimes be a fixed dollar amount of $25. However, it can vary by card because every card has a fixed floor rate for minimum payments.
  • If you owe a lot (over $1,000), this is where your minimum will be calculated based on your balance. It’s normally around 2% (plus extras like interest and fees).

Why your minimum could increase

There are other factors that could cause your minimum payment to go up.

  • Late on a past payment
  • You’ve exceeded your credit limit
  • Your interest rate went up
  • Your balance has increased

Where you can find your card’s minimum?

Normally you can find it in your cardholder agreement that comes with the paperwork you receive with your card or online when you log into your account. If you can’t find it, you can always call your card issuer’s customer service and have them explain them to you.

Try to always pay more than the minimum

Paying the minimum looks like the easier, and less expensive, option, but you’re actually going to be paying more in the long run. My recommendation is to always try and pay your balance in full every month. However, if that’s a no-go, try doubling your minimum or even paying $20 more.

For example, if you hold a $2,500 balance and have a rate of 15%, you will be paying around $164 in interest every month making just a minimum payment of $25. (Paying $25 for 12 months comes out to $300.)

Don’t hinder your other financial responsibilities, but if you can pay more than the minimum, it will save you more than you think on interest.

It’s important to know the ins and outs of your credit card because it has the potential to really help, or hurt, you down the road. If you missed my previous pieces about credit cards, you can find them below.

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