Do You Know How Your Credit Card’s Minimum Payment Is Calculated?

The minimum payment on your credit card statement is one of the most critical numbers you need to pay attention to when it comes to your bills. When you carry a balance on your credit card, the card issuer will determine a minimum payment you must make to maintain good standing.

The minimum payment is the lowest amount you are allowed to pay in order to stay current. How this amount is calculated can be affected by the balance on your account.

Here’s how credit card issuers calculate that number.

• Flat Percentage of Your Balance

For example, some cards use a flat percentage of your balance to calculate your minimum payment and don’t include interest and fees. The typical flat percentage rate is 2%. Therefore, if you have a balance of $1,000, the minimum payment is $20. Your payment is applied to interest, fees, and principal.

• Percentage Plus Interest and Fees

Many other card issuers charge a smaller flat percentage rate – typically 1% – then add any interest and fees that have accrued. When you have a balance of $1,000, have accrued $16 in interest and have no additional fees, your minimum payment is 1% of your balance – $10 – plus $16 in interest for a total of $26.

• Fixed Dollar Amounts

In the case of balances between $25 and $1,000 on your credit card, the minimum payment may be a fixed amount, such as $25. This is as outlined in your credit card agreement. When your balance falls below a certain threshold, all credit cards have a fixed rate for minimum payments.

• Remaining Balance Owed

In the case of very small credit card balances that fall under the fixed floor rate, the minimum payment may simply be shown as the total statement balance. If your balance is $15 and the minimum fixed floor rate is $25, then the minimum balance owed is $15.

Should You Only Pay the Minimum on Your Credit Card?

Always check the minimum payment on your credit card statement. Paying this amount keeps your account in good standing and helps you avoid late fees, late payment penalties on your credit report, and penalty interest rates. However, it’s always a smart idea to pay more than the minimum payment.

Depending on how much you owe on your credit card, paying only the minimum could affect your credit utilization ratio. The credit utilization rate is the percentage of available credit that is currently occupied by debt. If it’s too high, it can hurt your credit score (check your credit score today).

Paying the minimum can make it difficult to reduce your credit utilization from month to month.

Paying only the minimum can also cost you more in interest over time. If your balance is large, you will pay more interest, which can add up to thousands of dollars over time. If you can, pay more than the minimum payment to reduce the interest you may be charged in the future. Ideally, pay your balance off in full every month.

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