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Calculating Your Minimum Monthly Payment

Most people get their credit card statement and see their payment options include the entire balance, a minimum payment, and an option for something in between those two numbers. Do you, however, know how that minimum payment is calculated? Do you know what effect that minimum payment has on your overall credit card balance? There is a reason that is can seem like you never make any progress in paying down your credit card debt.

Every credit card issuer and type of card can have slightly different ways of calculating the minimum amount due on a credit card. Although the specific numbers may differ, the methodology is still the same. The minimum payment is determined by the current outstanding balance and interest rate.

Floor Payments on Lower Balances

The fixed floor payment is usually set at around $25. If your outstanding balance is less than $25, your minimum payment will be the full outstanding balance.

If your balance is above the fixed floor payment, then your minimum payment will be that fixed floor payment. So, if your outstanding balance is $50 and fixed floor payment is $25, your minimum payment will be $25. This fixed floor payment is set as your minimum payment until your outstanding balance gets sufficiently high that the interest and principal due exceeds the fixed payment amount. Typically, the payment does not change until your outstanding balance gets close to around $1,000. If you have a $900 balance and fixed floor payment of $25, however, it will take more than 36 months for you to pay off your outstanding balance. That calculation assumes that you are not charged interest on your outstanding balance. If you have a 25% APR, it will take you closer to 67 months to repay the $900. Increase the interest rate to a 30% APR, and the time to pay off the balance increases to over 93 months. That’s almost eight years!

Variable Payments on Higher Balances

The exact dollar amount when your payment switches from the fixed amount to a variable payment is dependent upon your interest rate and the credit card company’s fixed floor payment amount. At this point, there are two methods for calculating your minimum payment.

  • Fixed Percentage of Outstanding Balance: Your minimum payment is simply a percent of your outstanding balance. On average, the fixed percentage is 2% of the outstanding balance. If you had a fixed floor payment of $25, your payment would not exceed $25 per month until you had an outstanding balance of $1,250. That is because your minimum payment would be calculated as follows: $1250 x .02 = $25.
  • Percentage of Outstanding Balance Plus Accrued Interest: This is the most common method for calculating a minimum payment. The payment is based on a percent of the outstanding balance (usually around 1%), interest accrued during the last month, and any additional fees that the borrower incurred (such as late fees).So, if you have an outstanding balance of $2000 and a 28% APR, your minimum payment calculation would look something like this:Percent of outstanding balance: $2,000 x .01 = $20

    Accrued interest = $2,000 x (.28/365) x 30 = $46

    Total minimum payment = $20 + $46 = $66

This example estimates your accrued interest based on a 30-day billing cycle in which the entire $2,000 is charged interest, and interest is compounded daily (which is why the annual rate is divided by 365). The details can be slightly different depending on the length of the billing cycle and timing of purchases, but this example gives you a good, general idea about how the minimum payment is calculated.