How Minimum Credit Card Payments Are Applied
Banks apply minimum payments to the balance and interest in a variety of ways. Typically, when making minimum payments, almost all the money goes toward interest incurred and only a tiny fraction goes toward the balance.
Beyond that, any amount you pay over the minimum due is normally applied to the balance with the highest annual percentage rate and then to balances with lower annual percentage rates.
Making minimum payments can ultimately result in paying over double the original balance especially when you consider the total estimated opportunity cost. Cardholders making minimum payments and actively using their credit cards are very unlikely to pay off their balances.
How Long Will It Take Me To Pay Off My Credit Card Bill
It is important to be aware of the interest rate that you’re paying on your credit card bill and the monthly interest charge for the credit you’re receiving. If your monthly repayments are too little, your bill may actually be rising month-on-month in interest alone.
To work out exactly how much time it will take to pay off your credit card bill, use our calculator above.
Key Things To Know About How Much Interest You’ll Pay On Your Credit Card
- If you pay off your balance in full by your due date, you won’t owe any interest.
- If you carry a balance from month to month, the interest you’ll owe depends on your Annual Percentage Rate . That shows how much interest you’d pay in a year. But since credit card interest gets charged daily, your card’s interest rate is its APR divided by 365.
- The average APR among new credit card offers is 18.24%. But credit card APRs vary widely based on the applicant’s credit standing.
- Nearly all credit card APRs are variable, as opposed to fixed, meaning they’re based on a particular benchmark interest rate. This usually is the prime rate, which banks use when lending to each other.
- Many cards offer lower introductory APRs on purchases and balance transfers for a limited time, often starting at 0%. Once the introductory period ends, the APR will change to the normal rate.
There’s no way to tell you how much interest you’ll owe without knowing your card’s balance and APR as well as the monthly payment you can afford. But if you plug that info into WalletHub’s calculator, you’ll have your answer in no time.
To find the interest rate on your credit card, look at your cardmember agreement and your monthly credit card statements. Your interest rate will be there in the form of an annual percentage rate . But as annual implies, an APR is the cumulative interest rate for a whole year, which isn’t all that helpful for calculating actual interest charges from day to day or month to month.
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How To Calculate Your Monthly Apr
Calculating your monthly APR rate can be done in three easy steps:
For example, if you currently owe $500 on your credit card throughout the month and your current APR is 17.99%, you can calculate your monthly interest rate by dividing the 17.99% by 12, which is approximately 1.49%. Then multiply $500 x 0.0149 for an amount of $7.45 each month. Therefore, you should have been charged $7.45 in interest charges based on your $500 balance.
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 . 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.
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Disclaimer: Whilst every effort has been made in building these credit card repayment calculators, we are not to be held liable for any special, incidental, indirect or consequential damages or monetary losses of any kind arising out of or in connection with the use of them. Full disclaimer. These tools are here purely as a service to you, please use them at your own risk.
What Is A Credit Card Minimum Payment
Lets start with a quick refresher. Credit cards are a form of revolving debt, which means they dont impose a strict deadline by which you have to pay your balances off in full. Your repayment term is up to you.
If you can afford to pay things off all at once, you can. You can also make your cards minimum payment and keep your debt outstanding indefinitely.
The is the amount of money youre required to pay toward your outstanding balance each month. If you dont do so by the due date, your card issuer charges you a late fee and eventually reports you to the credit bureaus.
For example, say you owe $2,000 on one of your credit card accounts. Your credit card issuer will usually require that you pay at least $40 per month to stay in their good graces.
You can find your minimum payment on your credit cards billing statement. Its usually easiest to look it up online using your card issuers online interface.
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How To Create A Credit Card Payment Calculator
Many people are painfully aware that when you buy on credit you can end up paying a lot more than you expect. This lesson shows how to create an Excel worksheet for calculating the true cost of paying with credit.
In this lesson two credit card payment worksheets will be created: one that assumes you make a fixed monthly payment and another that assumes you pay only the minimum amount each month. Both worksheets will calculate the total interest paid for the privilege of borrowing.
It’s Best To Pay More Than The Minimum
Paying just the minimum can feel like saving money because it means a much smaller hit to your checking account than paying the full balance would. But in fact, the less you pay now, the more youll pay later.
So, if youre low on cash, how much should you put toward your balance?
Honestly, you should pay as much as you can afford to pay without derailing your other financial obligations, McClary of the NFCC says. Try to pay double the minimum payment, if you can afford it. If thats a no-go, consider paying $10 or $20 more than the minimum, he suggests.
You can also make your monthly obligations more manageable by asking your issuer for a lower interest rate or moving your high-interest debt to a card with a 0% introductory APR on balance transfers. With some interest rate relief, your balance won’t grow as quickly. That can make it easier to pay down your debt faster.
About the author:Claire Tsosie is an assigning editor for NerdWallet. Her work has been featured by Forbes, USA Today and The Associated Press. Read more
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Choose A Payment Method
The Credit Card Payment Calculator allows you to choose one of two payment methods:
Making minimum payments should be avoided if possible, as they typically keep you in debt longer than you want. By creating a budget, you can see exactly how much you can afford to pay toward your credit cards often resulting in larger payments and less interest.
How much interest can you avoid by making larger payments? Find out today!
How To Calculate Credit Card Interest
To determine the true cost of your , youll need to calculate your credit card interest. Also, be aware that the credit card might have a promotional period with either a zero-percent or low interest rate. When you are calculating your annual percentage rate , do not include this promotional period.
First, come up with the current outstanding balance on your credit card, or how much you still owe. You will find this on your latest credit card statement. You can also log into your account on the credit card issuers website for more information.
You will also need the annual interest rate. The company should include this information when you sign up for a card. It will also be printed on your credit card bill. The interest rate may be listed as APR. The interest rate may also change over time. Many credit card companies will advertise a lower interest rate for the first year or six months. A variable APR will then apply at the end of this trial period, so be sure you have the correct interest rate on hand.
Find the Daily Interest Rate
Its important to note that credit card companies charge interest by the day, not by year. That means you will accrue interest every day the debt remains outstanding, instead of taking on interest at the end of the year. Consult with your bank or credit union to find out which days are included in the billing period. Some lending institutions may exclude holidays and weekends.
Find Your Average Daily Balance
Calculate the Total Interest
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Alternatives To The Minimum Payment
As you can see, making your minimum payment should be your last resort. Every day your high-interest credit card debt is outstanding costs you money. Increasing your monthly payment by $50 or $100 could save you thousands in the long run.
Unfortunately, sometimes you simply dont have the money to pay more than the minimum payment. If it only happens on rare occasions, its not the end of the world. Your finances will survive.
However, if you suspect that youre going to be stuck making minimum payments for months at a time, its worth considering alternative measures. For example:
- Balance transfer: Some credit cards let you transfer your balances to them and charge 0% interest for up to eighteen months. These cards have strict qualification requirements, so theyre primarily for people with good credit.
- Refinance or consolidate: Refinancing or consolidating your credit card debt into an installment loan can help you get a more affordable interest rate or a lower monthly payment.
These remedies are drastic compared to tightening up your budget and paying more toward your credit card debt. They involve some level of risk, so make sure you do your due diligence first.
Many Months Many Calculations
You know how to calculate the payment and interest charges for a single month, but how can you calculate over longer periods?
Its easiest to use a spreadsheet or a hand-built table to see the entire process of paying off your debt. The idea is the same as making an amortization table for a home or auto loan: Each row represents one payment.
It may take a small amount of spreadsheet wizardry, but you can take it slow or start with a template, and youll have a valuable tool. With each new row, look back at the loan balance at the end of the previous month . For a sample of how your spreadsheet might look, copy the images in this tutorial.
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Prioritize Your Monthly Payments By Return
If your finances are advanced enough that youre saving a significant portion of your income each month, you need to be intelligent about where you allocate your resources. You want as much of your money as possible to go where itll benefit you the most.
In other words, you usually want to direct your funds to the account that will bring you the highest return. When it comes to debt, that means concentrating on paying down the account with the highest interest rate, commonly known as the debt avalanche technique.
In practice, you also have to consider your other savings goals, such as building an emergency fund or saving for retirement.
Say you have the following debt accounts:
- $2,500 in credit card debt at 15% with a $50 minimum payment
- $10,000 auto loan at $5% with a $300 monthly payment
- $40,000 student loan debt 3% with a $275
Youre also interested in investing in an S& P 500 index fund for retirement. You expect it to return around 8% per year, on average, but youre bullish on the current market and dont want to miss out on any gains.
If you have $750 in net income before paying your debts, you have enough to meet all your minimum monthly payments with $125 left. It would be best to allocate that surplus toward your credit card debt or the index fund, not the auto or student loan.
To get help planning your debt repayment and investment strategies, consider reaching out to a credit counselor or a financial advisor.
How Do I Know How Much My Minimum Payment Is
The easiest ways to find your minimum payment each month are to look at your mailed billing statement or log in to your credit card account online and go to the payment tab or most recent billing statement. If necessary, you can also contact your bank over the phone to ask what your minimum payment is for the month.
As part of the , credit card issuers are legally required to provide a “minimum payment warning” on each billing statement. This warning tells you the total time it will take to pay off your credit card balance and how much interest you’ll pay by only making the minimum payments each month.
Check your statement carefully each month to find out your current minimum payment. This amount can change month to month based on your balance and can also include things like late payment fees and past missed payments.
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What Factors Affect The Minimum Payment Calculation
Minimum payment amounts are almost always calculated based on your interest rate and your monthly balance. In some situationslike when your account balance is under a certain amountyou may be charged a fixed amount, such as $25 or $35. The one exception to this is if your total balance is smaller than the fixed minimum payment amount, in which case you will be asked to pay your full balance.
For cardholders whose balances are above a certain threshold, the minimum payment may be calculated using several methods: either a flat percentage of your entire balance or a percentage plus the cost of interest and fees. Depending on the card issuer and your agreement, either of these methods might be used to calculate your minimum payment.
If your card issuer charges a flat percentage, your minimum payment could be anywhere from 2% to 4% of your total balance. In this case, the interest and any fees will be deducted from the total percentage calculated. If they use the alternative method, you’ll pay a lower flat percentageusually around 1%but you’ll also pay the applicable interest and fees for that period.
What’s The Difference Between A Current Balance And A Statement Balance
When you receive your bill, there will be two balances listed: current balance and statement balance. A current balance is the total amount of money you currently owe on your credit card. Meanwhile, a statement balance is made up of all the charges you made during the last billing cycle. This doesn’t include any pending charges or purchases made after your billing cycle ended.
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What Happens If You Only Make The Minimum Payment On Your Credit Card Statement
If you only make your minimum payment, and it leaves a balance on your card after the end of the billing cycle, then that balance will be subject to interest. The average credit card interest rate is about 20%, and that means any debt left after your minimum payment will grow by 20%. Some cards may restrict your grace period when you don’t pay your statement balance in full, so any new charges could immediately start accruing interest.
How Do Credit Card Issuers Calculate Minimum Payment
Once you receive a credit card, you are contractually obligated to make minimum payments monthly, or you will face fees and penalties. Minimum payments barely exceed the interest rates incurred every month, so only making the minimum payment could take much longer to pay off your balance fully.
Generally speaking, payment calculation depends on how much you owe in relation to your balance. Nevertheless, there are a few additional factors that can influence your payment amount.
If you owe a lot: If you owe more than $1,000, your minimum is dependent on your balance. It comes out as approximately two percent.
If you owe some: If you owe $25â$1,000, minimum payments are a predetermined, fixed amount, most likely $25. Remember, this fixed amount varies from card to card.
If you owe very little: If you own less than $25, your minimum payment will be your total balance if you owe less than $25. So, for example, if you owe $15, that will be your predetermined minimum payment.
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