Best Way To Budget For Minimum Credit Card PaymentsJanuary 14, 2021
You must be familiar with the term minimum payment – it’s the amount of money you need to pay to your credit card issuer each month if you don’t want to be hit with a late fee or penalty interest rate.
More often than not, the minimum amount due is a fraction of the balance that exists on your credit card.
However, unless you know how to calculate the minimum payment due, it can be difficult to budget for it, because the amount usually changes each month.
How is the minimum payment on your credit card calculated?
Your credit card agreement contains details as to how minimum due is calculated, or you can contact a customer representative to understand it.
Usually, the amount is calculated using one of the three methods listed below.
Percentage of balance
If you owe a significant amount at the end of your billing cycle (usually greater than $1,000), the minimum due is a percentage of your balance (this can be anything between 1% to 5%).
Some issuers use a slightly different method to arrive at the minimum amount due.
They calculate a certain percentage of your existing balance (before finance charges), interest charges for the month, and applicable fees.
If your balance, at the end of the month, is somewhere between $25 and $1,000, then you may have to pay a fixed dollar amount as the minimum due.
There is a fixed floor for minimum payments, so if the calculated minimum payment is less than that floor, you may be charged the floor amount.
The amount of balance you owe
If the balance owed by you is less than $25, it is probably less than the floor amount determined by the issuer for minimum payments.
In that case, your existing balance becomes the minimum amount due.
Why your minimum amount may increase from one month to the next
Of course, as your existing balance increases from month to month, your minimum payment due will also increase, provided it is being calculated as a percentage of your pending balance.
However, the amount may also increase due to factors like a hike in interest rates, or an increase in the percentage used for calculation due to elevated credit risk.
If you were late on a previous payment, or if you’ve spent more than the limit available to you on your card, then also your minimum payment amount may increase.
Minimum payments are useful if you are short on cash during a certain month; however, you should never make it a practice to pay just the minimum due on your card every month.
If you do, you’ll find that balance due on your card continues to increase – in fact, it may reach such levels that it negatively impacts your credit score.
The minimum payment mostly consists of the interest due on your balance, plus a small amount of principal.
So, if you want to reduce credit card debt quickly, you must pay down as much of your balance each month as possible.
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