Interest Plus Percent Of Balance
Some credit cards may define the minimum payment as “X% of the balance plus interest” – especially cards where the interest rate is allowed to change. Defining the minimum payment like this ensures that the credit card payment will always cover interest plus X% of the principal balance.
In the credit card payment calculator, enter the X% in the “Min Payment % of Balance” field and then check the “Plus Interest” box.
What Is A Minimum Monthly Payment
The minimum monthly payment is the lowest amount a customer can pay on their revolving credit account per month to remain in good standing with the credit card company. Making the monthly minimum payment on time is the least a consumer needs to do to avoid late fees and to have a good repayment history on their credit report. The amount of the minimum monthly payment is calculated as a small percentage of the consumer’s total .
How To Use The Credit Card Minimum Payment Calculator
In the following, you can read how to employ the credit card minimum payment formula:
- Statement balance: For the first step, you need to set the statement balance, which is the base of the interest calculation. Note that credit card issuers apply the interest rate on your average daily balance during the current billing cycle to compute the accrued interest. After they add up previous balances, the transactions you made during the current billing cycle, and the related accrued interest and fees, they obtain the total statement balance. If you would like to get more insight, you might want to check out our average daily balance calculator, where we give you more details on this subject.
- Due date: The closest day by which you need to pay your next monthly .
- : The Annual Percentage Rate provided by the credit card issuer. If multiple APRs apply on your balance, you may check the real APR with our credit card APR calculator.
- Interest capitalization frequency : Most credit card issuer apply daily capitalization , which means that interest is calculated and added onto your balance on each day. To get more insight into the mechanism behind this process, you may check out our compounding interest calculator.
In the result section, you can read the main details of payments with minimum payment and fixed payment. You can also learn how much interest you can save if you pay a higher fixed amount than the monthly minimum.
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Paying The Balance Vs Paying The Minimum On A Credit Card
When it comes to paying off your credit card balances, you have multiple options. It can be tempting to only pay the minimum. Why pay more if you dont have to? If times are tough and youve been relying on your credit cards to help you pay other bills, its understandable if you feel you can only afford the minimum payment temporarily. Paying the balance in full, however, is best when youre able. It may help prevent your credit score from lowering and can save you money long-term.
You Pay More In Interest
Let’s say you routinely use a credit card charging an interest rate of 16%. A nearby electronics store is going out of business, and you snag a 65-inch TV that usually sells for $3,500 for $2,700. If you pay the balance in full before the next billing cycle, you get a real bargain a sales price and no interest payment.
Imagine that you don’t feel comfortable paying the balance in full, so you make a $63 payment each month until the card is paid off. If you never add another charge to the card, it will take five years and four months to pay in full, including $1,330 in interest payments. Altogether you spend $4,030 for the TV, and by the time you’re done paying for it, it’s over five years old, and newer models have been released.
Would you have agreed to purchase the TV that day in the electronics store if you’d known it was going to cost you more than $4,000?
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No : Reallocate Extra Money
To reduce your payments, the best method is to pay off as much of your credit card debt as possible upfront. This money will go directly toward the principal amount, reducing the interest owed, and subsequently the minimum payment. Find extra money in your budget by cutting or reducing unnecessary purchases.
Minimum Payments Vs Fixed Payments
The credit card payment calculator lets you enter a Fixed Monthly Payment amount. If you do, that amount will override what you have entered in the Min Payment fields. If the fixed payment is the same as or greater than the first minimum payment, you will generally pay off the credit card much sooner and pay much less interest overall.
Why? If you are only making minimum payments, the minimum payment decreases as the balance decreases, so you aren’t paying as much of the principal from month to month. Our credit card calculator can help you see just how much the difference might be.
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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.
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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How Can I Lower My Credit Card Minimum Payment
There are a few ways to help lower your credit card minimum payment. You might try making fewer purchases with your card until your balance decreases. A lower balance could mean less interest charged, which can lead to lower minimum payments.
You could also try to make payments that are more than the minimum amount. Paying more than the minimum amount can help reduce your balance sooner and lead to lower payments over time.
These approaches can also lower your credit utilization ratio, which may help improve your credit score.
Making Your Minimum Payment
The minimum payment must be paid by the cutoff time on the payment due date. For most credit cards, the cutoff time for your minimum payment is 5 p.m. Some credit card issuers extend the cutoff time to later in the day. Check with your credit card issuer to find the exact time. Make sure you give yourself enough time to get it in on time.
Your credit card issuer will give you a few options for making your minimum payment by mail, online, or other the phone.
- If you mail your payment, you can send a check or money order.
- If you make a payment online or over the phone, you’ll be able to supply your checking account and routing number to make an electronic payment.
You can’t use another credit card to make your minimum payment.
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Use A Loan Payment Financial Calculators For Motivation
Use a loan repayment calculator to run a range of repayment scenarios and motivate yourself to pay significantly more than the minimum month after month. lets you calculate a monthly payment around a desired payoff time frame. Its a good reminder that you dont have to pay the bare minimum, and it gets you thinking about all the things you could do with your funds if they werent consumed by interest charges.
What Happens If You Only Pay The Minimum Payment On Your Credit Card
If you make at least your credit cards minimum payment by the due date, you will avoid late fees and penalty APRs. However, any unpaid balance carried between months begins to accrue interest. Plus, not paying in full gets rid of the cards grace period.
It can be tempting to just pay the minimum every month. But in the long run, it will cost more money and it could snowball into serious credit card debt if youre spending more than you can pay off every month. Its best to always pay your credit card balance in full, if possible.
You should also know that only amounts paid above the minimum are applied to the balance with the highest APR on the card, if you have multiple balances .
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Is Paying The Minimum On A Credit Card Bad
Its not good. In most cases, paying just the minimum amount due on a credit card is riskier than its worth. Its also exorbitantly expensive if you stick to paying just the minimum amount for more than a month or two.
Imagine, for example, that you owe $3,000 on a card with a competitive APR and a 2% minimum payment policy. If you pay at least $270 a month, you could potentially knock out your balance within a year and pay roughly $230 in interest, according to the Federal Reserve Bank of Dallas’s Payment Calculator.
But if you paid just the minimum amount due for as long as you carried a balance, your debt would more than double and it would take you decades to get rid of it. Instead of paying a couple hundred dollars in finance charges, youd pay nearly $3,750 in interest, the Fed estimates.
There are rare cases, though, when it might make sense for you to pay only the minimum amount due but only if your plan is temporary:
- If youre in such a tight cash crunch that youre concerned about missing other bills, then paying as little as you can get away with could give you some crucial breathing room.
- Alternatively, you may decide to pay just the minimum amount due for a month or two if you have a 0% APR card and need to temporarily free up cash. This is also a risky strategy, but it could make sense if youre disciplined and confident in your ability to bounce back quickly.
No : Consolidate Debt
If you have multiple credit card payments, consider consolidating these debts. Consolidation will create one lump payment each month, which might reduce your minimum payment. One option is to take out a personal loan to cover all your debt and then pay off that single loan. Consult a financial professional to explore your options.
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How Credit Card Companies Calculate Your Minimum Payment
First, if your balance is low enough, your credit card issuer might choose to make it your minimum payment. For example, they might ask you to pay the entire amount whenever you owe less than $20.
If youre anywhere between that debt balance and around $1,000, your card issuer will charge you a fixed dollar amount per month. Usually, its equal to the number below which theyd require you to pay your entire balance.
For example, a credit card company that asks you to pay your cards balance as long as its below $20 would likely start your minimum payment at $20 if you owed $750.
Finally, if you owe more than roughly $1,000, your credit card company usually sets your minimum payment as a small percentage of your outstanding balance, rounded to the nearest ten. The most common amount is 2%, but it varies by card.
Alternatively, they may set it at a lower percentage, like 1%, and add in whatever fees and interest you accrued during that period.
If your account is in delinquency, your credit card provider may add your overdue balance to your minimum payment.
Minimum Payments Help Maximize Stability
Cards are subject to a variety of terms and conditions, so individual rules governing repayment dictate how your credit card debt is repaid to a certain extent. It is important to remember that additional payments can be made toward credit card purchases at any time, reducing the revolving balance at a faster rate than minimum payments do. Understanding how credit card billing works is the first step toward prudent financial management.
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What Happens If I Only Make The Minimum Payment On My Credit Card
Making the minimum payment means you are paying the bare minimum. It keeps your credit card account in good standing. It also helps avoid late fees. But thats about it. Paying the minimum amount due still racks up interest on the remaining balance and extends the life of your debt by months, possibly even years.
Look at your credit card statement. Credit issuers often include a table labeled Minimum Payment Warning. This chart estimates that amount of time it will take to pay off your credit card balance if you only pay the minimum. What does yours say? Five years or 30 years? Reduce this timeframe by paying more than the minimum.
High credit card balances mean a high credit utilization ratio. And this directly impacts your credit score. The ideal credit utilization rate is under 30%. Aim to use no more than 30% of your total credit limit across your credit cards. A bad credit score will make it harder to qualify for financial products, like credit cards, loans, or mortgages.
When Does It Make Sense To Roll Your Credit Card Debt Into A Loan
If you have a lot of credit card debt and you’re feeling overwhelmed, it may be best to consolidate all of your credit card debt into a loan. This is the easier option when it comes to consolidating, and it typically offers a lower interest rate than you’re paying with your credit cards.
- Interest Rates. If the loan you’re considering offers you a lower interest rate than your credit cards, it makes sense to consolidate your credit cards. You’ll end up paying less in interest, and this will save you money in the long run.
- Multiple Payments. If you’re making multiple credit card payments each month and you’re worried about missing one, consolidation could be a viable option for you to look into. It’ll streamline each of your payments into one monthly payment.
- Pay Off Your Debt Quicker. Since the personal loan has a lower interest rate, more of your payment will go to paying the balance off. This means that you’ll be able to get out of debt quicker and pay less over the life of your loan.
- Utilization Ratio. Multiple credit cards with high balances can hurt your credit utilization ratio. By combining all of your debt into a loan and paying off your credit card balances, your credit utilization will go down. This will make your credit score rise as you fall below the 30% credit utilization mark.
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Where To Find Your Cards Minimum
Youll find information about how your issuer calculates your minimum payments in your cardholder agreement, which is available:
In the pamphlet you received in the mail when you got the card
Online, when you log into your account and view your card details
If you cant find the information you need, call the customer service number on the back of your credit card, and a representative can fill you in on the details.
You can find out more about minimum payments by reading your credit card statement. By law, your issuer is required to include a Minimum Payment Warning, which discloses how long it would take to pay off your current debt if you paid only the minimum each month. Reviewing that warning might motivate you to pay off your debt faster.
How Does Making The Minimum Payment Affect My Credit
Your credit scores will not be directly affected by paying the minimum amount on your credit card each month, and making on-time payment each month can actually help your credit health overall. Payment history is the most important aspect of your credit scores, and even one late or missed payment can have a negative impact on your scoresso if you’re at least paying the minimum on your bill, your payment history shouldn’t take a dip.
Paying just the minimum, however, may impact your , depending on how much revolving debt you have. Credit utilization is calculated by dividing your total balances by your total available credit. Experts recommend maintaining a utilization rate under 30% to avoid negatively impacting your credit scores. By paying the minimum, your total revolving debt will go down at a slow pace and won’t do much to reduce your credit utilization.
Paying only the minimum each month could cost you quite a bit when interest is factored in and compounded over time, so try to pay more than the minimum when you can. If you can only afford to pay the minimum amount, however, do it so you avoid any late or missed payments.
If you’re looking to pay off your credit cards, or want to learn more about your current credit card debt, consider getting a free copy of your Experian credit report and scores from Experian so you know what’s in your credit file.
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