How Credit Card Companies Calculate Minimum Payments

For all credit card owners there is a minimum amount the credit card company requires the card holder to pay every month and this is what is called the minimum payment. The minimum payment due may be a percentage of the total current balance outstanding. It could also be set by the credit card company at 1% (or more it depends on the credit card company) of the principal amount outstanding in addition to the total interest payment due.

The minimum payment on a monthly basis is the amount the card holder is required to pay for their account to be in a good standing, this means that the minimum payment does not have to fall below a certain amount that the credit company has set for the card holder.

For example if the last credit card statement was a balance of $1,200 then the interest rate will be 15% with a minimum payment at 2%. What the credit card company does is by using the above given information to calculate the minimum payment. the calculation will look like this $1,200 x .02= $24.00. Which means that the $24.00 will be the monthly minimum the card holder must pay on their credit card for that particular month. The question is however how much of this amount ($24.00) goes towards the interest and the principal.

When the interest rate at 15% id divided by 12 months and then multiplied by the balance of $1,200 then the interest that will be paid for that month will be $15.00. Which ideally means that off the $24.00 payment only $9.00 is what will pay for the principal. This also means that if the card holder does not spend any more money until the next payment is due then there balance will be $1,191 this is an amount that is retained when the $1,200 minus $9.00 of the principal which equals to $1,191.

Sometimes if the card holder has incurred other fees such as late payment fees, over limit fees, credit insurance and the processing fees then all these fees could also be included in the minimum monthly payment. If the card holder has any queries regarding the calculations of the minimum payment then they should ask their credit card company to show them how they arrived at the minimum payment.