What is The Formula Used to Calculate A Minimum Credit Card Payment? | CreditShout

What is The Formula Used to Calculate A Minimum Credit Card Payment?

By Kaitlin T / January 5, 2011
how credit card minimum payments are calculated

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Q: I know there is a formula that credit card companies use to calculate my minimum monthly payment, but what is it?

A: The formula differs from company to company and from card to card. The only way to know for sure is to ask the credit card company, or to check your credit card agreement.

If you want to want to understand this topic better, we suggest reading this article. That being said, there are a few standard ways to calculate minimum payments.

A Simple Formula

The most common formula for minimum payments is 3% of your balance. All you have to do is multiply your balance by 3% or 0.03. So if your balance was $1000, your minimum payment would be $30 a month.

Alternatively, some credit cards offer interest only payments, or interest plus a percentage (around 1%) of your balance. To estimate an interest only payment, divide your APR by 12 and multiply by your balance. This isn’t an exact figure because of the way interest compounds, but it is a close estimate.

You need to know that most credit cards have a minimum fixed payment which is around $25. Even if 3% of your balance is lower than that amount, you would still pay the $25 minimum (unless of course your balance is 0).

Try Our Calculator

You can also calculate your monthly minumum payment by using our calculator on the CreditForums blog. All you will need is your estimated average daily balance over the course of the month and your card’s APR.

Knowing what your minimum payment would be can be helpful in knowing how much you can afford to borrow, but be careful. If you always pay the minimum payment, you can add years to your loan, and hundreds, even thousands of dollars to your cost of borrowing. As most financial advisers will tell you, pay extra when you can. Your ultimate goal should be to keep the balance down to where you can pay it off every month.

The editorial content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone. Additionally, the opinions of the commenters are not necessarily the opinions of this site

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