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Where Your Credit Card Minimum Payment Comes From

One way to raise your credit score is to pay your credit card bill in full every month. Of course, not everyone can do this and depending on your financial situation you may have to carry a balance regularly. At the very least, your card issuer expects you to pay the minimum amount listed on your credit card statement. But where does this number come from? Read on as we explain how credit card companies calculate your minimum payment and what can happen if you only pay that amount.

See how long it’ll take to pay off your credit card debt.

How Companies Come up With Minimum Payments

When it comes to setting credit card minimum payments, different companies use different formulas. Some credit card issuers require their customers to pay a percentage of their balances every month. In most of these cases, you can expect your minimum payment amount to fall somewhere between 1% and 3% of your balance.

Other companies set a baseline percentage and then ask their customers to pay outstanding fees and interest on top of that amount. So ultimately, how much you’re expected to pay every month could depend on whether you’re carrying a balance and whether you’ve incurred fees for miscellaneous reasons like paying late or going over your credit limit. That means your minimum payment amount could change from one month to the next.

Sometimes credit card issuers want consumers to pay a fixed amount every month. That doesn’t happen very often. But many credit card companies have absolute minimum credit card payment amounts. So you may have to automatically pay a certain amount if paying only 2% or 3% of your balance would give you an extremely low minimum credit card payment.

If your minimum payment amount is too low, paying off your credit card debt could take a long time (more on that later). That’s why there are federal guidelines requiring credit card companies to set certain minimum payments. Ideally, consumers should be able to pay off their balances in a timely manner.

Calculating Your Credit Card Minimum Payment

Where Your Credit Card Minimum Payment Comes From

Let’s look at an example of how a credit card issuer might calculate your minimum credit card payment. Let’s say that your credit card company wants you to pay 3% of your balance. If your balance is $600, your minimum payment for the month would only be $18.

But what if you have to cover your fees and interest, too? Let’s say you charged $600 to your credit card this month, carried a balance of $500 from the previous month and your APR is 24%. Your minimum payment could be $43 if you have to pay 3% of your total balance plus interest (assuming that having a 24% annual percentage rate is the equivalent of having a 2% monthly interest rate and the interest you owe is 2% of your unpaid $500 balance).

If your credit card company tacks on a $25 fee because you exceeded your $1,000 credit limit, your credit card minimum payment could go from $43 to $68.

Related Article: How to Read Your Credit Card Statement

What Happens if You Only Make Minimum Payments  

Technically, you could get away with making only minimum credit card payments every month. But doing so may raise a red flag. When a consumer tends to only pay the minimum amount, banks and other credit card issues often assume that he or she is in some sort of financial trouble.

What’s more, if you’re only paying the bare minimum, getting rid of your credit card debt will take a while. In the meantime you could waste money unnecessarily, especially since you’ll have to pay interest on top of your unpaid balances. Having a lot of debt relative to the amount of money you’re making could make buying a house or taking on additional loans and lines of credit more difficult.

Your credit score won’t take a hit just because you’re only making minimum payments. But if you’re not paying down your balances, you could end up with a high debt-to-credit ratio. That could lower your credit score.

What Happens if You Don’t Pay the Minimum

If you can’t make your minimum credit card payment, you may face consequences. Your credit card issuer may revoke some of your privileges, like access to a year-long 0% interest promotion. You may incur a fee and your interest rate could increase.

If you don’t pay your credit card bill at all, you’ll not only have to pay a late fee, but your credit score could also drop. Based on the FICO® credit scoring model, 35% of your credit score depends on your payment history. And revolving debts like credit card debt typically carry more weight when it comes to calculating your score.

Related Article: How Your Credit Card Utilization Can Affect Your Score

Final Word

Where Your Credit Card Minimum Payment Comes From

There’s a reason why every credit card statement includes a minimum payment warning. By only making minimum payments, you could be saddled with debt for years.

To find out how your card issuer calculates your credit card minimum payment, you’ll have to read your card terms and conditions. And keep in mind that if you can’t pay the minimum amount, skipping a credit card payment isn’t the answer. In that scenario, it’s best to contact your credit card company and ask whether it can waive your late fee or push back your payment deadline.

Photo credit: ©iStock.com/sturti, ©iStock.m/IPGGutenbergUKLtd, ©iStock.com/OlegGr

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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