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Minimum monthly payment

Q. How do credit card companies figure the minimum monthly payment?

The minimum monthly payment is based on the account balance rather than the particular interest rate. It's typically around two percent of the account balance.

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Both the minimum monthly payment and the account balance are stated on the credit card statement. The monthly minimum percentage can be calculated by dividing the minimum monthly payment by the account balance. The following is an example of how to compute the minimum monthly percentage on an account with a balance of $1,000, and minimum monthly payments of $20 and $25:




Account balance
Minimum monthly payment per statement
Minimum monthly percentage
$20 divided by $1,000
$25 divided by $1,000

Paying only the minimum monthly payment is a fool's game. In most cases, the bulk of the minimum payment goes toward interest, and a smattering goes toward principal. If your prior month's payment was late and you get hit with a $29 late fee, chances are none of the payment will go toward principal. Thumbs-up for the credit card company; thumbs down for you.

The following table illustrates how much you will save in interest if you make more than the minimum monthly payments on a credit card with a $1,000 balance and a 19 percent interest rate.

$1,000 credit card balance
19 percent APR
2 percent minimum payment
Monthly payments Time to pay off debt* Total interest you will pay*
Minimum (Starts at $20 and goes down a little each month)
22 years
Fixed $20
8 years
Fixed $30
4 years
Fixed $40
3 years
*years and amounts have been rounded-off for illustration purposes

To find out what it's going to cost you in interest to make the minimum credit card payment vs. a fixed amount each month, enter your numbers in Bankrate's calculator "The true cost of paying the minimum."


-- Posted: Aug. 14, 2002




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