Q&A: How is the minimum payment on credit cards calculated?

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Question: How is the minimum payment on credit cards calculated?

Answer: Most card issuers use the "average daily balance" method to calculate the minimum payment on credit cards. The actual math requires a calculator, but it can be explained in simple terms.

The balance for each day is added up and then divided by the total number of days in the cycle. New purchases are usually included and any payments you make are subtracted to get the average daily balance. Once your average daily balance is calculated, the interest charges for the month are added (the percent used to calculate interest is based on the monthly rate of your APR). Then, the card issuer uses the total amount to calculate the minimum payment, which is usually between 1 percent and 3 percent of that total number.

Your minimum payment on credit cards will vary every month since credit cards offer a revolving line of credit. Revolving credit means you have the freedom to buy (or not to buy) items on credit up to your limit. This is an example of open-end credit.

In contrast, if you get an auto loan, you pay a fixed amount every month. That is an example of closed-end credit.

Where to find details about the minimum payment on credit cards

Okay, this isn't as easy as it should be. There isn't a standard answer, but with a little patience, you'll find it. It's usually on a credit card company's website. And typically, it's in the fine print of the disclosure statements you'll get when you're approved for a card.

If you can't find your disclosure statements, check the Schumer Box (the box that contains the rates and fees) on the credit card's website. To find this box, you'll need to look for a link on the card's home page and you'll see something like "Terms and Conditions," "Pricing and Terms," and so on. Now, if you don't see minimum payment information inside the box, then it might be below the box.

Minimum payments aren't always based on a percentage

Sometimes, the payment is a standard amount if the calculated minimum payment falls below a certain amount. For example, just below the Schumer Box (where the rates and fees are) for the Chase Slate credit card, you'll find their minimum payment policy: "We will calculate the minimum payment as the larger of: 1) $25 (or total amount you owe if less than $25); or 2) the sum of 1% of the new balance, the periodic interest charges, and late fees we have billed you on the statement for which your minimum payment is calculated."

The minimum owed, if you have a small balance, used to be lower than the $15 and $25 amounts that are the norm right now. But really, it's to your advantage to pay as much as you possibly can. If you can't pay off the entire balance, then at least pay more than the minimum.

Zero percent introductory offers and minimum payments

One of the most common ways to lose a zero percent introductory offer is to fail to make a minimum payment on time. You have a great deal with your interest-free offer. But you still have to make timely minimum payments on the balance. And if you don't, you could lose your intro rate. That means you'd suddenly have your current balance accruing interest at the "go-to rate," which is the APR you were going to have after the intro period ends.

Pay more than the minimum, whenever possible

The best way to use credit cards is to pay the bill in full every month. Remember the Schumer Box mentioned above? Within that box, you'll see how long the grace period is for the card. It's usually between 21 and 25 days. This is the period between the posting date of your purchase and the day that interest starts accruing.

You can avoid paying interest if you pay during the grace period. If you do this, it doesn't matter how the issuer calculates the minimum payment because you pay the total amount due every month.

So think of your minimum payment on credit cards as exactly that--a minimum amount--that you're required to pay. Paying in full makes sure you don't pay interest on your purchases and it also helps you build an excellent credit score. If you can't pay in full, then focus on paying more than the minimum.


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