Credit cards have a lot of details hidden in the fine print. The terms and conditions will let you know the APR, billing cycles, and, most importantly, the ramifications of not making a minimum payment.
When you receive your monthly credit card statement, it will list the due date and the minimum payment. By making a credit card minimum payment, you’re keeping your account up to date and avoiding any potential penalties.
However, paying only the minimum amount will keep you stuck under the weight of credit card debt. As the balance continues to increase due to interest and any additional charges, paying the new minimum payment becomes increasingly more difficult.
We’re here to help you understand the minimum payment definition, the pitfalls of making only the credit card minimum payment, and how you can avoid falling into this trap.
How To Calculate the Minimum Payment
So, how much is the minimum payment on a credit card, and how is it calculated?
Minimum payments are subject to the individual policies of the respective credit card company. If you check your credit card statement regularly, you’ve probably noticed that your minimum payment due can fluctuate up and down. Without paying off this minimum portion of your balance, you’ll end up facing late fees and potentially losing your introductory APR.
Because of the fluctuating amount, you might have a hard time determining the minimum balance on your credit card. Without being able to discern the amount ahead of time, it might leave you in a lurch when the bill comes around, and you fail to save enough to make the minimum payment.
However, if you understand how your credit issuer calculates your account’s minimum payment and the penalties for failing to meet the amount, you can take the proper precautions. You can make sure you’ve saved an adequate amount, and you won’t be wondering “if I pay the minimum on my credit card, how much will it be next month?”
To be certain of how to calculate your minimum monthly payment, you need to check your credit card company’s terms and conditions. Sometimes the amount can be based on a percentage of your principal balance. Other companies may offer a flat rate, making the calculation exceptionally easy. Or, it can be a combination of the two.
If your credit card minimum payment is based on the principal balance method, then you need to look up what percent of the principal balance that the company uses. Then you just add the percentage of your balance to the sum of your fees plus interest. This formula is defined by the US Treasury’s Office of the Comptroller of the Currency.
You may also need to check if your credit card company institutes a minimum payment floor. A minimum payment floor is the least amount that can be due.
For example, if the credit card company applies a minimum payment floor of $25, then even if your percentage of principal balance plus fees and interest is below this threshold, you will still need to pay a minimum of $25.
Making A Minimum Payment
Making minimum payments on credit card purchases is of the utmost priority when being a cardholder. However, make sure that if you make the minimum payment on credit card purchases, your payment is sent before the date posted on the statement. Look at your credit card company’s terms and conditions to make sure that you know exactly when the cutoff time is.
By making the minimum payment on time, your account is kept up to date, and as long as you still have some unused credit, you can continue to use your card normally. Paying the minimum also helps you to avoid late fees or penalties. Your interest rate will not be negatively adjusted; it might even improve. Keep in mind that even if you make the minimum payment, unless it pays your balance in full, you’ll still accrue interest charges.
Most creditors will give you a variety of options in which you can make your minimum payment. Many still offer you the ability to send the payment through the post via check or money order. Some will allow you to make a payment over the phone. Nearly all will accept payments online. However, if you opt to make a payment through the creditor’s online portal, check to see if they’ll allow you to use another credit or debit card to make the payment.
What Happens When You Pay the Minimum
Making only the credit card minimum payment should be your last option. It will allow you to eventually pay off your purchases, but at a steeply inflated price. Here’s a closer look at what happens when you pay only the minimum amount.
Longer to Pay Off Debt
The main reason we recommend paying off your credit card balance in higher amounts, rather than just paying the minimum, is because by paying the minimum amount, getting out of credit card debt will take significantly longer.
Thanks to the Credit Card Accountability Responsibility and Disclosure (CARD) Act, credit card companies need to make clear to their clients the drawbacks of only making the minimum payment. Your statement should detail a comparison of the time difference between making minimum payment versus the amount needed every month to pay off the balance within three years. For example:
- If you have a principal balance of $500 with a 12% rate and you make the minimum payment of $25, you’ll pay off the balance in 34 months.
- If you have a principal balance of $500 with a 12% rate and you make the minimum payment of $50, you’ll pay off the balance in 23 months.
Bigger Interest Charges
Once you’ve surpassed your introductory APR, your balance is going to increase the interest charges month-over-month. By making your credit card minimum payment, you might not even pay off the interest you’ve incurred.
Sometimes it’s easy to disassociate what you’ve bought from your credit card bill. For example, using your credit card to purchase a new $1,000 phone may seem like a deal. However, if you only make the minimum payment on your card, that phone ends up costing significantly more: If you took out a card with a 24% APR to buy your new $1,000 phone, then making $50 payments for three years would mean that phone actually costs $1,240.17
You can calculate this by taking your cards APR (24% in this case) and dividing it by 12 (making it 2% each month for this example.) Then you multiply the monthly rate with the principal balance ($1,000 due to the price of the phone.) This means that if you only pay the minimum balance, your interest next month will be $20. The balance would be outrageous if you didn’t even make the minimum payment.
Negatively Impact Credit Score
The percentage of your used credit is called your credit utilization ratio. Your credit utilization ratio is calculated by comparing how much you currently owe by how much credit you’ve been extended.
This number matters because it plays a large role in your credit score. If you’ve nearly reached your credit limit, it can severely impact your credit score. This can affect your ability to obtain loans or open new credit cards with reasonable rates.
What Happens if You Miss A Minimum Payment?
Paying less than the minimum payment or missing the payment outright can have serious consequences on your finances. Not only will it take you longer to pay off the balance, but the interest charges will increase, and you will also be hit with late penalties and fees. If you currently have a promotional APR, then it may be canceled due to the missed payment. If you’re a serial offender, then your credit card company may even raise your annual interest rate.
Missing a payment can also affect your credit score. Aside from the increasing credit utilization ratio, if you’re delinquent more than 30 days, the creditor will report your missed payment to the three major credit bureaus. Black marks such as these can last up to seven years on your report.
What Happens if You Pay More Than the Minimum?
Paying more than the minimum amount due is the optimal scenario. By keeping your card in good standing and making payments regularly, you’ll build your credit score and avoid any unnecessary interest. You’ll begin decreasing your balance faster, which in turn saves you money in the long run. If possible, you should try and pay off your balance as fast as you can.
If you’re only able to make the minimum payment, then that’s better than missing it and incurring late fees. However, as soon as you can start making larger payments, then this doing so should be your top priority. If your debt starts to become unmanageable, then you should consider speaking with a debt consultant about your options.
What if You Can’t Afford to Make the Minimum Payment?
Life is unpredictable, and sometimes you can end up in a situation that makes meeting financial obligations impossible. You might be tempted to miss “just one payment” but this is a downward spiral. Fees multiply, interest rates climb, and you may find yourself without a card because the company froze it. Eventually the company, or the debt collector they sold your balance to, could end up taking legal action against you.
If you’re at the point where you start to receive calls from collection agencies, know that you still have options. CreditAssociates’ debt settlement program is designed to help you get on top of your financial situation.Contact CreditAssociates today for your free debt relief consultation at 844-378-2633 or via our online form. One of our Debt Consultants will give you the details of the program and see how we can help with your unique situation.