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

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

Paying your credit card account as agreed is important for your credit score, since payment history makes up 35% of a credit score.

Your minimum payment on a credit card is just what it sounds like. This payment is the bare minimum you are required to pay on your credit card account each month and still have your account in good standing.

Most credit card companies calculate your minimum payments as a small percentage of your current balance, typically 1 to 2%. And some issuers add in late fees and finance charges as well.

Let’s say you have a card that charges 2% of a current balance for a minimum payment. And 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.

How Long Will It Take to Pay Off Making Only Minimum Payments?

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.

To see just how long, take a closer look at your monthly credit card statement.

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. And if you can manage this payment amount or better, this a good repayment strategy for paying down credit card debt.

But 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.

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.

What Carrying a Balance Can Do to Your Credit

Carrying a balance on your credit card may not only be expensive over time, it can also affect your credit scores if the balance is a significant percentage of your credit limit. Your payment history, as noted above, counts for about 35% of your credit score. 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’s free tools. You get two credit scores, along with a breakdown of what’s affecting your scores and a personalized plan to improve them — updated monthly.

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