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Minimum Payments: What Are They & How Are They Calculated?

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Paying your credit card as agreed is a big deal when it comes to maintaining your financial health. Missed payments, after call, can incur big late fees and really muck up your credit. (You can see how yours is doing by viewing two free scores every 14 days on Credit.com.) But, given you’re not locked into a set monthly payment, it can be totally confusing about how to stay current on your credit cards. Bottomline: You’ll avoid a delinquency so long as you make what’s known as the minimum payment. But be forewarned: doing so month-to-month isn’t the best strategy when it comes to credit cards.  

What Is a Minimum Payment?

A minimum payment on a credit card is just what it sounds like. It’s the bare minimum your issuer requires you pay each month to keep your account in good standing.

What’s the Typical Minimum Payment?

Most credit card companies calculate your minimum payment as a small percentage of your current balance, typically 1% to 2% of the total, plus some variance for any interest you might’ve accrued. So, let’s say you have a card that requires 2% of your current balance as your minimum payment. If you have a $1,500 balance on the card, you would have a minimum payment of $30. Your cardholder agreement should tell you exactly how your credit issuer calculates your minimum payment for your account.

Awesome, so I Only Have to Pay a Small Portion of My Balance Each Month?

Technically, yes, but figuratively, no. Paying the minimum will keep your account in good standing, but carrying any type of balance on your credit card will be expensive over time (more on that in a minute) — and it can affect your credit scores, particularly if the balance is a significant percentage of your credit limit. Your payment history is the most important factor of credit scores, accounting for about 35% of most models. But your amount of debt – which includes how much of your available credit limits you’re using – is about 30% of your credit score. If you must carry a balance, it’s ideal to use less than 10% of your available credit limit; exceed 30% of your limit, and your scores may start to suffer.

You can see how your payment history and credit card balances are affecting your credit scores by using Credit.com’s free credit report summary. It’ll give you a breakdown of what’s affecting your scores and a personalized plan to improve them, updated every 14 days.

How Long Will It Take to Pay Off My Credit Card Debt Making Only Minimum Payments?

It should be obvious that, because your minimum payment is such a tiny portion of your outstanding balance and most of it gets applied to the interest you owe, it will take you a very, very long time to pay off a card balance by only making the minimum payments.

Thanks to the CARD Act, credit card issuers are required to disclose how long it will take you to pay off your current balance by making only minimum payments, and how much interest you will pay. Also thanks to the CARD Act, card issuers are required to disclose the monthly amount it would take to pay off your current balance in three years. If you can manage this payment amount or better, this a good repayment strategy for paying down credit card debt.

What Can I Do if I’m Only Paying the Minimum Right Now?

If money is tight, you may want to begin by paying double the minimum payment on the credit card with the highest interest rate, while continuing to make the minimum payments on your other credit cards. This method is one of several strategies you can use to pay off credit card debt. When the balance on the credit card with the highest interest rate is paid off, move to the card with the next highest interest rate. Keep going until all your credit card account balances are zero. You also might want to look into a balance-transfer credit card, which lets you transfer a high-interest balance to a new card with a low-to-no introductory annual percentage rate (APR) for a certain period of time, usually 12 to 15 months. That’ll save you on interest and help expedite your repayment plan.  

This article has been updated. It was first published August, 15, 2014.

 


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