How Credit Card Issuers Calculate Your Minimum Payment

With your credit card balance fluctuating every month, you may not know how much to set aside for your minimum payment. A credit card minimum payment is the bare minimum you can pay on your credit card each billing cycle and still be in good standing, and credit card issuers calculate the payment using either a flat percentage or a calculated amount based on accrued interest charges and fees on your statement balance.

“A minimum payment requires you to demonstrate both a willingness and ability to make payments each month,” says Gerri Detweiler, education director for Nav, a credit management service for business owners. “But it’s often shocking when you realize how little those payments go toward paying off your debt.”

Shelling out just the minimum payment generally keeps you in debt longer, costs you more money and could hurt your credit score. But skipping the payment can be even more damaging.

[Read: Best Low-Interest Credit Cards.]

Why You Should Make the Minimum Payment

If you don’t make the minimum payment by the due date, the issuer may charge a late fee. After your payment is late by 30 days, your issuer may also file a report with the credit bureaus, which can hurt your credit.

“When money is tight and you can’t afford to pay more than the minimum payment, then at least pay the minimum to ensure you maintain an on-time payment history on your credit report,” Detweiler says. “Payment history is the single most important factor affecting your credit scores.”

You can set up automatic payments to ensure your minimum payment is paid on time each month. That way, you won’t forget and you won’t incur late fees, which can cost up to $39.

To gear up for your next billing cycle, here’s how card issuers calculate minimum payments and how you can predict what you’ll owe on your next statement balance.

How Minimum Payments Are Calculated

An issuer will add up previous balances, the transactions you made during the current billing cycle and accrued interest to calculate your statement balance. Then, the issuer generally uses one of two methods to calculate the minimum payment:

Method 1: Flat percentage. Some credit card issuers calculate the minimum payment as a percentage of your total statement balance, including interest and fees, usually between 1% and 3%.

For example, say your minimum payment is calculated as 2% of the balance, which is $5,000. You would owe a minimum payment of $100.

Method 2: Combined percentage, interest and fees. Other credit card issuers calculate your minimum payment as a smaller percentage of your statement balance plus the interest and fees accrued during the statement period.

For example, say your statement balance is $5,000, and your issuer calculates your minimum as 1% of the balance plus interest and fees. If you’ve accrued $30 in interest and $38 in late fees, after adding $50 for the calculated 1% of your balance, your minimum payment would come to $118.

Depending on how your issuer defines the minimum payment, a few different scenarios could change the math. For example, if you have a small balance, you may pay either a fixed dollar amount, such as $25 or $35, or the full balance if you owe less than that fixed dollar amount. The card issuer may also add any overdue payments or over-the-limit balances to your minimum payment.

[Read: Best Credit Cards for Bad Credit.]

Where You’ll Find Your Minimum Payment

Your cardholder agreement details how your minimum payment is calculated. The agreement is mailed to you with your card and is also available when you log in to your online credit card account. If you can’t find the information you need, call your issuer for the details.

Your monthly statements include your balance, payment due date and minimum payment. You may also notice a minimum payment warning box. The box shows how long it would take to pay off the card’s balance by making only the minimum payments, assuming you don’t make further purchases, and how much you’d need to pay each month to clear the balance in 36 months.

“When (the minimum payment warning box) first came out, I think people were shocked at how long it would take to pay off the balance if you only make the minimum payment and how much it would cost,” says Ruth Susswein, deputy director of national priorities at Consumer Action, a financial consumer advocacy nonprofit.

For example, say you have a balance of $2,123.77. If you only make minimum payments, paying off that balance would take about five years, and you’d end up paying back about $5,383 total when interest is added, according to a sample statement from Wells Fargo.

What Happens When You Only Pay the Minimum

Credit card issuers generally only require that you make the minimum payment every month, but getting by on the bare minimum is not a good long-term move.

Consider the consequences of only paying the minimum:

You’ll pay more in interest. Look no further than the minimum payment warning on your credit card statement for proof. That warning explains how long it will take to pay off the balance if you pay only the minimum each month, plus how much you’ll pay total when interest is included. Your statement also lists how much you’re paying on interest just in that month.

The interest charges consumers overlook can be shocking. Shanté Nicole, financial educator and founder of Financial Common Cents, which provides credit, budget and debt management coaching, had a client who was only making minimum payments on her seven credit cards. The client’s homework one week was to review her credit card statements and write down the interest she paid over six months. The interest totaled $2,400. “That was so eye-opening for her,” Nicole says.

Your credit can take a hit. Part of your credit score is based on the amount of credit you’re using compared to how much creditors have extended to you. But when your balance climbs, so does your credit utilization ratio, which is the percentage of your credit line you’re using. Paying only the minimum means your utilization doesn’t drop by much month after month, which could hurt your credit. Generally, aim to use about 30% or less of your credit limit. So if you have a $5,000 credit card limit, then try to use $1,500 or less.

[Read: Best Student Credit Cards.]

How Major Credit Card Issuers Calculate Your Minimum Payment

Each issuer sets its own calculation for a minimum credit card payment. Here are the minimum payment policies of nine credit card issuers:

Card issuer Calculation for minimum payment
American Express Amounts that are past due, penalty fees and up to 1/24th of any over-limit amount rounded to the nearest dollar, plus the greater of:

— 1% of the full balance + interest on the statement, excluding any overlimit amount.

Bank of America The greater of:

— $25.

— 1% of principal + interest + late charges.

Barclays The greater of:

— $25 to $27, or the statement balance if less than this amount.

— 1% of the principal balance + interest + returned -payment fees + late-payment fees.;

Capital One Past due amounts plus the greater of:

— $25, or the statement balance if less than this amount.

— 1% of the balance + new interest + fees.;

Chase The greater of:

— $25, or the statement balance if less than $25.

— 1% of new balance + interest + late fees.;

Citibank Amounts that are past due or over the limit plus the greatester of:

— $25, or the new balance if less than this amount.

— 1% of the new balance rounded to the nearest dollar + billed interest or minimum interest charge + late fees.1.5% of the new balance rounded to the nearest dollar.

Discover Amounts that are over the credit limit plus the greatest of:

— $35.

— 2% of the new balance.

— $20 + fees for any applicable debt protection products + interest charges + late fees.

U.S. Bank Some or all of the balance amount over your credit limit plus the greater of:

— $30.

— 1% of your new balance + fees + interest.

Wells Fargo Past due amounts plus the greater of:

— $25, or the new balance if less this amount.

— 1% of the new balance + interest + fees.

How to Get Out of a Minimum Payment Rut

Credit card minimum payments are based on a small percentage of your balance and barely make a dent. If you’re struggling to pay off your credit card debt and interest charges are mounting, you may feel stuck. But there are options. Consider debt consolidation with a balance transfer credit card or personal loan. These can help you manage debt and save on interest costs in the long run.

More from U.S. News

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How Credit Card Interest Is Calculated

Should You Save or Pay Down Credit Card Debt?

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