How Credit Card Issuers Calculate Your Minimum Payment

You may not be aware of how much you need to pay each month for the minimum. Minimum payment is the minimum amount that you must pay to maintain your account.

The two main methods that credit card companies use to set minimum payments are: Here's how major credit card companies calculate minimum payments so you can prepare for the next billing cycle.

What is the minimum payment on a credit card?

It is the minimum amount that you have to pay on your credit card each month in order to maintain a good account. The minimum payment is calculated by adding your interest and fees to a certain percentage of the balance. By paying the minimum amount, you avoid late fees, APR penalties, and other negative information on your credit report.

Remember that interest may be charged if your balance is still unpaid after you have paid the minimum. Credit card experts advise cardholders that they should pay off their monthly balances.

Chris Fred, Executive Vice President and Head of Credit Cards and Unsecured Lending at TD Bank, says, "You will save money over time and your credit utilization rate will be lower." These factors can also improve your credit score.

Fred says that it also makes it easier to reduce your payments to the minimum in the future.

How do you find your minimum payment?

Check your monthly statement for the minimum payment due and the date. This document must be sent to you by the card issuer at least 21 days prior to payment due date.

A minimum payment warning box is also included in the monthly statement. This tells you exactly how long it will take to pay your balance if only minimum payments are made. The monthly statement also tells you how much money you will need to pay in order to clear your balance within 36 months.

Check your cardholder agreement if you are unsure how to calculate the minimum payment. If you did not receive one when you first opened your card, you can also access it by logging into your online account. You can also call the number listed on the back of the credit card to get the information. You can also check the database of card agreements maintained by the Consumer Financial Protection Bureau.

How Minimum Payments are Calculated

Minimum payments are calculated by adding up your monthly card balance including all fees and interest charges. There are two common methods for calculating minimum payments:

Percentage flat. You will pay a percentage based on your total balance including interest and fees. This is usually between 1% to 3%. Say your minimum payment is 2 percent of your total balance. That's $5,000. The minimum payment would be $100.

Percentage plus fees and interest. You could pay a lower percentage, such as 1% of your balance, plus any interest and fees that have accrued over the period. If your statement balance was $5,000 and you incurred $80 in late fees and interest charges, then the minimum payment would be $170. If you pay a minimum of 1% plus interest and late fees, that would be $170.

The math could be different depending on how the issuer defines minimum payments. If you have a small amount of debt, for example, the issuer may require that you pay a certain amount (such as $25 or $35) or your entire balance, if it is less. Card issuers may also add overdue balances or payments to your minimum payment.

Can Your Minimum Payment Change?

The minimum monthly payment may change depending on how you use your credit card.

If you pay less than minimum or miss payments, the credit card issuer may increase your APR. Minimum payments are increased by late fees and penalty APRs.

You may be able to reduce your next minimum payment if you pay more.

Each card issuer has its own formula for calculating the minimum payment. The minimum payment policies for nine major credit cards are listed below:

The larger of:

Interest is charged on a percentage of the balance depending on your card agreement.

The greater of:

1% new balance plus late fees and interest charges.

The greater of:

1% plus any new fees and interest charges.

The greater of:

1% new balance plus late fees and interest charges.

The greater of:

1% of the new balance

The greater of:

The card will cost $15 or $20 depending on its agreement. This amount includes interest, late fees, and any fees applicable for debt protection products.

Charges, interest and amounts exceeding the credit limit plus the greater of:

1% of the new balance

Wells Fargo Past due amounts, over limit amounts and the greater of:

1% plus fees and interest on the new balance.

Please note: We checked the cardholder agreements of major U.S. issuers in order to determine how minimum payments were calculated. Calculations may vary at the discretion of the card issuer or depending on the credit card and cardholder. Consult your cardholder agreement, or contact your issuer to find out how the minimum payment is calculated.

What happens if you can't make the minimum payment?

Several financial consequences can result from not making a payment on a credit card or paying less than the minimum amount by the due date. You can expect to hear from your creditors if you are late with payments.

You shouldn't be affected by a missed payment if you make it up before 30 days. You could be charged a late payment and lose the introductory annual percentage rate if you had one.

Your credit score may be affected if the issuer reports your late payment. The issuer may increase the interest rate if you are 60-days late. After 180 days, your account may be closed, and the balance sold to a collection company, further damaging your credit score.

What Happens If You Pay Only the Minimum?

Thomas Nitzsche is senior director of brand and media at Money Management International.

The minimum payment is usually a small portion of the balance. This means that it could take many years to pay your card off and you will be paying a lot of interest. Credit card balances will also appear on your report. Higher balances could indicate to lenders that your ability to pay back debts is not good.

Nitzsche says that if you are experiencing a temporary setback such as a layoff, or a major medical problem, it might be necessary to make only the minimum payment. This should only be a short-term solution to protect your score, and not a plan for the long term.

If you are eligible for a promotional APR of 0%, you may decide to only pay the minimum. You may see the balance on your credit report. This may affect your credit score, but you won't pay interest if you pay off your balance before the promotional period expires.

How to Make the Minimum Payment

Pay the minimum amount due on your credit card every month.