Credit Card Minimum Payment Calculator
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How Your Credit Card Minimum Payment is Calculated
Understanding how your credit card interest and monthly payment is calculated is important. Not only does it help you become more informed, it also helps you use your credit card more effectively and save money.
If you have ever wondered how your minimum monthly payments are calculated or the puzzling formula behind monthly interest charges, the truth is it isn't that complicated once you understand how the system works.
The Basics of Credit Card Interest
If you pay off your balance in full each month, you won't need to worry about interest charges.
Still, you should always understand the interest rate associated with your card and whether it's fixed or variable -- by far the more common of the two. Variable interest rates can change, but your bank is required by law to notify you before raising your rate.
Your credit card interest rate is also called an annual percentage rate, or APR, which can be as high as 29.99%. This rate, called the nominal rate, usually ends up being an "effective interest rate" that's a little higher because interest gets factored in.
Your Periodic Interest Rate
Most credit card companies today used something known as the average daily balance method to calculate your interest charges. This means that interest is compounded based on the daily balance on your account.
You aren't charged interest on a yearly basis. As the interest compounds daily (a little interest is added to your unpaid balance every day), you can figure your daily rate by dividing your APR by 365 or 360, depending on the bank. As an example, say you have an APR of 15%. That works out to a periodic interest rate (or daily periodic rate) of 0.041% a day.
Your Average Daily Balance
This is another area that can be confusing, as the amount of interest you owe increases every day you do not pay the balance. Because you do get credit for paying off some of the balance early, your bank looks at your average daily balance, which is the average amount of your unpaid balance over the course of the month.
As an example, assume you have a $1,000 balance for 10 days accruing interest. On the 11th day of the month, you make a $300 payment. On the 21st day, you pay another $500. This means your average daily balance is $633, which is what the bank uses to calculate your interest charges.
Calculating Interest Charges
Once you know your periodic interest rate and your average daily balance, you can see how the bank charges you interest.
Just multiply your average daily balance ($633 in the above example) by the periodic interest rate (0.041%), then multiply it by the number of days in the month. If the month has 30 days, this example would mean interest charges of $7.79.
How to Calculate Your Minimum Payment
The minimum monthly payment on a credit card is the smallest amount you need to pay by the due date each month. Your minimum payment will likely change month to month, as your bank bases it on your unpaid balance at the end of the billing cycle.
Most credit card issuers have a minimum fixed dollar amount that the minimum payment cannot fall below, such as $15 or $20, except when your outstanding balance is less, in which case the total card balance is due.
The formula for calculating the minimum due can vary a bit by card issuer. There are two basic ways to set a monthly minimum payment:
- Percentage + fee. This means your balance is multiplied by a percentage (usually 1-3%).
- Percentage + finance charge. Your balance is multiplied by a percentage and a finance charge is added.