How is a Credit Card Minimum Payment Calculated?

If you have a credit card, you might be wondering how the minimum payment on your credit card is calculated. We did some research and we will now explain exactly how your credit card’s minimum payment is calculated.

How is a Credit Card Minimum Payment Calculated?

Usually, the way your minimum payment is calculated depends on your credit card balance. For example, if your balance is more than $1,000, your minimum payment is calculated by multiplying your balance by 2%. However, if your credit card balance is below $1,000, you will be charged a flat rate minimum payment, such as $25 or $35, depending on your bank. If the flat rate is, for example, $25 and you have a balance of $10, your minimum payment will be $10.

For example, if you have a credit card balance of $1,000, at most banks your minimum payment will be 2% of the $1,000, which comes to a $200 minimum payment.

To reiterate, your minimum payment is the minimum amount of money that you must pay to keep your credit card account in good standing. If you don’t pay the minimum payment by the due date, your credit score will suffer as a missed payment notation will be added to your credit report, significantly dragging down your credit score.

In addition to your account being marked as late, your bank will likely charge you a late fee, and in some instances, your bank may charge you a penalty APR that’s significantly higher than the normal APR you’re used to paying.

Normally, you should always seek to pay more than the minimum, however, we know that life happens and oftentimes we are stuck only paying the minimum payment. If you only pay the minimum payment, it can take you a very long time to pay off your credit card debt.

This is so because the minimum payment is so low that most of your payment is going towards paying the interest accruing on your account and not the actual balance.

Also, if you’re only making the minimum payment on your accounts, this could send red flags to lenders that you’re in a financial crunch since you’re unable to pay off the money that you’ve borrow and are therefore resorting to only making the minimum payment on your account.

Flat Percentage Minimum Payment

Some card issuers calculate your minimum payments based on a flat rate percentage (usually at a 2% rate) of your statement balance. For example, if you have a statement balance of $10,000, your minimum payment would be $200 under the flat percentage minimum payment. That said, to pay off your card within a reasonable amount of time, you need to make a larger payment than the minimum payment.

Percentage + Interest + Any applicable fees

Other card issuers calculate your minimum payment based on a flat fee, let’s say 1% and then add interest that has accrued on your statement, as well as any late fees. For example, if you have a $10,000 statement balance, 1% would be $100, add interest, which comes in at $170, and a late fee of $35, this would give you a minimum payment of $305. So, under the late percentage minimum payment, based on a 2% fee, you’re better off and will have a lower minimum payment than this method of calculating your minimum payment.

How to Find Out How Your Card Issuer Calculates Your Minimum Payment?

If you’re curious about how your card issuer or bank calculates your minimum, you can usually find this information in your cardholder agreement.

Usually, the cardholder agreement is either given to you at the bank when you open your credit card or it’s mailed to you along with your credit card. Some banks offer their customers the ability to download a copy of the cardholder agreement via their online banking portal.

If you are set on finding your cardholder agreement, you can always give your card issuer a call and ask them to mail you a copy of your cardholder agreement.

If you want to find your minimum payment, you will be able to find this information on your credit card statement or via your online banking portal.

Also, most banks and card issuers place a box that shows how long it will take you to pay off your balance if you’re only paying the minimum payment. Other boxes will give you an idea of how long it will take you to pay off your card if you’re making larger payments that exceed your minimum payment.

By looking at this box, you will see that you will be able to significantly more quickly pay off your credit card balance and save a ton of money on interest if you pay you make a payment that’s larger than your minimum payment.

When banks and card issuer first started including this payoff box, cardholders were shocked at how long it would take them to pay off their credit cards if they only made their minimum credit card payment.

Example of Paying Down Credit Card Debt by Only Paying the Minimum Payment

For example, if you have a $5,000 credit card balance and you only make the minimum payment of $100, it will take you approximately 8 years to pay off your balance and you would have ended up paying $4,300 in interest. So, if you’re trying to pay down your balance and you’re only making the minimum, good luck paying down your balance any time soon.

How to Pay Off Your Credit Card If You’re Only Making the Minimum Payment

If you have a lot of debt and you’re only able to make the minimum payment on your credit card, you should consider taking out a debt consolidation loan. Usually, how this works is that you apply for a personal loan and use those funds to pay off your credit cards. After paying off your credit cards, you will have a single more manageable payment that’s likely going to be at a significantly lower interest rate. You should only take out a debt consolidation loan if you have a lot of debt scattered across several credit cards. Debt consolidation will help you pay off your debt more quickly and more cheaply than simply making the minimum payment on your credit card.

Here Are Some Terms That You Should be Familiar With

  1. Billing cycle – Your billing cycle is the length of time between your credit card statements previous closing date and the next closing date. Billing cycles usually range from 28 to 31 days.

  2. Credit card statement balance – Your credit card statement balance includes all of the charges that have posted during your billing cycle (previous close to next close).

  3. Credit card current balance – Your credit card current balance is the total amount of money that you owe on your credit card, this includes your previous statement balance, as well as any new charges you’ve made since then.

  4. Minimum Payment – This is the minimum amount of money that you are required to pay to keep your account in good standing. Your minimum payment is usually calculated as a percent of your current outstanding balances, as well as interest and any additional fees. Making only the minimum payment will make it very difficult and lengthy to pay off your credit card. You should always aim to make a significantly larger payment than just your minimum payment.

  5. Total Payments – Total payment refers to the entire amount of money that you’ll need to pay to pay off your credit card while only making the minimum payment.

To Pay Off Your Credit Card Balance Pay More Than the Minimum Payment

If you want to pay off your credit card, you should make more than just the minimum payment. Although you might feel like you’re saving money by only making the minimum payment, you will actually end up paying a lot more in interest in the long run. So, although you may save some money in the short term, you’ll end up paying a lot more in the long term.

So, you should do whatever you can to put some money aside to pay more than just the minimum payment. This will help you pay down your debt quicker and save money in the long run.

A quick and easy measure of how much you should pay is to double the minimum payment.

Another method that you can use to pay down your balance more quickly is to open a balance transfer credit card that comes with a 0% APR introductory rate. There are many cards out there that will allow you to pay no interest on balance transfers for 12 to 18 months. So, this could be a great way for you to pay down your credit card debt without paying interest.

What Can Increase Your Minimum Payment?

In addition to an increase in your credit card balance, here are some other things that could result in a higher minimum payment:

  • You paid your last credit card bill late
  • You went over your credit limit
  • Your regular APR changed into penalty APR
  • The APR on your credit card increased
  • Your card issuer changed its method of calculating your minimum payment

Credit Score Planet Frequently Asked Questions

1. What is the minimum payment on a $5000 credit card?

Your minimum payment will depend on your statement balance. For example, if you have a $5000 credit limit and you’ve used up $5000 of your available credit, your monthly payment can be calculated by multiplying your $5000 x 2%, which gives you a minimum payment of approximately $1000.

2. What is the standard minimum payment on a credit card?

There are two methods of calculating your minimum: (1) a standard flat rate of usually 2% of your statement balance, or (2) a percentage based method + Interest + Fees. Most credit card issuers use two of these methods to calculate your minimum payment.

3. What does it mean to make the minimum payment on a credit card?

To make the minimum payment means to make the least possible payment on your credit card to keep your credit card account in good standing.

4. Does my credit limit reset after making the minimum payment?

Your credit card limit does not reset after making the minimum. However, after making the minimum payment, you will likely free up some of your available credit.