Calculating your minimum payment
How does your credit card issuer determine your minimum
payment? Well, it's different for each issuer, but for the most
part, it is 2 percent to 4 percent of your balance. To calculate
your minimum payment, grab your last credit card statement and a
Let's say you have a balance of
$1,200 on one of your credit cards and your interest rate stands
at 15 percent with your minimum payment at 2 percent.
First, take your balance of $1,200 and multiply that
by your monthly minimum payment of 2 percent.
$1,200 x .02 = $24.00
So, $24.00 is the monthly minimum you must pay on
your credit card for that month. But how much of that $24 goes
toward interest and principal?
Well, divide your interest rate of 15 percent by 12
months and then multiply it by your balance of $1,200.
.15/12 x $1,200 = $15.00
The interest you will have paid for that month is
$15.00. That means that of the $24 payment only $9 is actually going
to pay down your principal. If you don't spend any more money until
your next payment is due, then your balance will be $1,191.00 ($1,200
minus $9 of principal = $1,191).
If you were to keep paying at this pace, it would
take you 196 months (16 years and three months) and $1,456.31 in
interest to pay off that $1,200 debt. To determine the true cost
of your monthly minimum payment and how long it will take to pay
off your card, visit Bankrate's minimum
payment calculator. You can also use the
calculator to see how paying more than the monthly minimum payment
can dramatically reduce both the interest you pay and reduce how
long it takes you to payoff that debt.
Remember, other fees such as late payments, over-limit
fees, credit insurance and processing fees could also calculate
into your minimum monthly payment, so examine your statement closely