How Is Your Credit Card’s Minimum Payment Calculated?

Have you ever wondered how the minimum payment on your credit card is calculated? I did!

I question a lot of things, and one of them was, “Well, if I owe $12,000 on this card, why is my minimum payment so low? What’s the catch?” ONE OF THE BEST THINGS I HAVE EVER QUESTIONED IN LIFE!!!!

Well, when it comes to the minimum payment due on your credit card statement-it is a number you must pay attention to. The minimum payment is the lowest payment you are allowed to pay to STAY CURRENT. So, let’s talk about how the creditor comes up with that number

1. FLAT PERCENTAGE OF YOUR BALANCE

Some creditors use a flat percentage of your balance to calculate your minimum payment without factoring your interest and fees, such as Navy Federal Credit Union (NFCU). The minimum monthly payment is 2% of the balance. So, if you have a balance of $4000, then your minimum monthly payment will be $80, which is then applied to your principal, interest, and any fees.

2. FIXED DOLLAR AMOUNTS

If you carry a small balance on your credit card, then your minimum payment is a fixed amount. I have a Victoria’s Secret Credit Card that I seldom use- once a year to be exact, so they will not close it. I usually spend about $75-$100, so my monthly payment is usually $40 because that is their fixed dollar amount if you fall below a certain threshold.

3. PERCENTAGE PLUS INTEREST AND FEES

Some creditors use a flat percentage rate (usually a small percentage) plus any interest and fees that accrued. So, if you have a balance of $4000, accrued an interest of $60, and have no additional fess, then your minimum monthly payment is 1% of $4000- $40 plus your accrued interest- $60, therefor, your minimum monthly payment is $100.

4. REMAINING BALANCE OWED

If you have a small balance due on your credit card, lower than the fixed dollar amount, then the minimum balance would be the remaining balance. So, if you have a balance of $24 on a credit card, and the minimum fixed dollar amount for that card is $40, then your minimum balance would be $24.

Now that we got this out the way, look at your last credit card statement, and you will be able to see how your minimum payment is calculated. If you are unable to figure it out, call the creditor and ask them.

SO, SHOULD YOU ONLY MAKE THE MINUMUM PAYMENT ON YOUR CREDIT CARD?

I say:

• Create a budget

• Create a plan to pay down your debt. You can use different methods to do so. Refer to the blog below, it has the links to the Avalanche and Snowball methods.

https://www.bybcreditconsultants.com/post/we-have-goals-to-crush-and-generational-wealth-to-build

Based on your debt repayment plan, you’ll know if to pay more than the minimum payment.

The minimum payment is the amount that keeps your account in good standing with the creditor, avoid late fees, and penalty interests. I always recommend paying more than the minimum payment to avoid paying more interest on the balance. Ideally, you should aim to pay the balance in full every month.

The picture below is a screenshot of an actual statement for a Navy Federal Credit Union Cash Rewards card. Pay attention on the balance and the monthly payment. Also, the interest and the timeframe if you were to make just the monthly payment if you were to never use the card again.

If you were to only make the monthly minimum payment of the card, it would take you 24 YEARS to pay off the total balance of $7,350.22, and will end up paying $15,143. However, if you were to pay $248, it would take 3 years to pay off and saving you $6,215.

REMEMBER, CREDIT CARDS ARE GREAT WHEN USE RESPONSIBLY!