November 24, 2008

# How Do Credit Card Companies Calculate Minimum Monthly Payments?

Do you know how your credit card company calculates your minimum monthly payment?

**In the past**, most companies calculated your minimum payment as **2%** of your **account balance**. Now, however, many companies are using a **new formula**.

The** minimum monthly payment** equals **1% of account balance** plus **finance charges** plus **fees**.

Assuming an account balance of $4000 at 16% APR:

1% of $4000 is $40.

The monthly finance charge on $3960 ($4000 – $40) is

The **minimum monthly payment** would be $40 + $52.80 = **$92.80**.

Under the old 2% method, the minimum monthly payment would have been $80.00.

I have to confess, I was completely unaware of the fact that some credit card companies had changed the way that they calculate minimum monthly payments. If you are getting out of debt, take a look at a recent credit card statement or call your credit card company. Ask them how, exactly, they calculate your minimum monthly payment.

I called a couple of credit card companies (*cold chill*) and most of the customer service representatives had a difficult time explaining the above calculation to me. And, after searching the web, most of the information about credit card companies and minimum payments was about the old way, of charging a flat 2% (or 4%). Bank of America and Citibank, however, did confirm that they use the 1% + finance charges + fees method. Also, if you were wondering how I figured the monthly finance charge on $3960 at 16%, I simply divided 16% by 12 (months in a year) and multiplied that number by $3960.

Want a sure-fire way of never having to worry about anything your just read? Live life without the silly things and be happy!

Final thought – If you have any more information about this subject, PLEASE share it with me and my readers. If your card uses a different method, I’d like to hear about it. It’s been so long since I dealt with a credit card company, I’m kinda out-of-the-loop, so to speak. Also, there was some debate about whether you would have to pay interest on $3960, which is the account balance minus the 1% payment, or on $4000. Plugging the numbers into this calculator from Bankrate, you get $92.80, which suggests that using $3960 is appropriate. Information on this page may be out of date. Please contact your credit card companies for accurate and current information.

I’m pretty sure you’re right. I have never carried a balance on any of my cards but I dug around for my T&Cs to confirm (which of course were super confusing to read.)

that’s a new info right there..i never thought they included finance charges on the minimum payment. i have to my credit card statements..thanks for the iinfo!

My credit card company just did this and my minimum payment is going to go down because of it. The old minimum was 3%, which gave me a minimum of about $220. The new is 1% plus fees and finance charges, and my minimum will be about $70.

The interest rate is zero and I don’t have any fees. That’s the reason it went down so much.

I have only seen the x% plus interest plus fees, with 1% being the most common. Though with this method you are assured of reducing your balance by 1% each pay cycle (assuming you don’t continue to add to the balance through use), whereas with the 2% flat, your principal reductions would be less.

For your example of $4000 at 16%, the two percent payment is $80, of which $52.97 would be interest and only 27.03 would be principal. (This method follows the above example of applying interest after the principal reduction).

Using the 1% plus method and a minimum payment of the greater of $20 or 1% plus interest, this card would take 217 months and $4553.94 in interest to pay off. The 2% method, though having lower monthly payments, will take 287 months and $6518.12 in interest to pay off (with the same greater of $20.00 or 2% minimum payment).

Yes the new method results in higher minimum payments for many cases (if the interest rate in the example was 12.12% the initial monthly payment would be the same), but higher minimums mean a quicker payoff time and less interest paid.

The new 1% plus method was something introduced through legislation (I may be wrong here, but I do recall reading something about this). This may make it more difficult for some to pay their debtors (those living paycheck to paycheck with their cards maxed out), but will also help others who can afford to make the new higher minimums and can stop relying on credit.

As of November 2008, Discover has switched my minimum payment to approximately 4% of the outstanding balance, up from 2%.

Chase has switched my Visa account with them to 5% of the outstanding balance, from the previous 2% of the outstanding balance.

This could be because I am carrying fairly large balances on these cards at relatively low interest rates. Cardholders with different usage patterns may have a different scheme imposed upon their accounts.

I had a great thing going at Chase – 38k cash advance (used as business loan) at 3.99% payments at 2% of balance (was able to buy land to divide and resale, great markup + I finance at 10%). Now they have changed to 5%, so payments are going from currently $560. to $1,300. (not exact). This is ok because I would just be paying off faster. People on a budget would be hit hard.

NOW the thing that upsets me is they are adding a $10.00 month service charge whether or not you have any balance or even use the card. I think that is changing the terms of the contract becauses it, in effect, raises my 3.99% interest, especially when the balance gets low or even zero. I have never heard of a monthly charge on an unused zero balance credit card. They say they are only doing this on accounts with low interest – in effect forcing us out. I have never had a late or missed payment.

Their only options were to go to 7% for 12 months and then on to what ever they wanted(chilling) or to pay them off and close the account.

I need cards (not chase) for travel and tracking business expenses and generally I do not carry a balance but if I should have to temporarily, they are all 8% or lower. I charge everything I can(mega miles) and pay bills online. I use about 10 checks per year and as long as I have a internet connection things are great!

I don’t live in fear of what my fica score, I simply don’t care, and cionsidered telling Chase to stuff it, but I am just going to pay them off and be done with it.

Is this 1% Consistent in all the banks?if not how can we get it?

I don’t know where the 1% + finance charge formula above came from, but it’s not what’s being used at Citi. Also, it seems to presume that the only condition that ever obtains is that the borrower pays ONLY the minimum payment.

For example, if the borrower pays the full balance, clearly the finance charge goes to ZERO. That is, this formula is adding on to the debt before payment is even due, which is highly unlikely – in the event the borrower pays off the full balance, the finance charge would have

to be rebated.

What I have observed in Citi’s practices is that balances of 25 years to pay off, presuming ONLY the minimum payment so calculated is made.

Still, I am no closer to finding out how these minimum payments really are calculated. But whatever it is, it does not appear to be 1% of Balance + the debt service based on the assumption that the ONLY possible payment is the minimum!?

?!? System Hosed my first comment!!

I don’t know where the 1% + finance charge formula above came from, but it’s not what’s being used at Citi. Also, it seems to presume that the only condition that ever obtains is that the borrower pays ONLY the minimum payment.

For example, if the borrower pays the full balance, clearly the finance charge goes to ZERO. That is, this formula is adding on to the debt before payment is even due, which is highly unlikely – in the event the borrower pays off the full balance, the finance charge would have

to be rebated.

What I have observed in Citi’s practices is that minimum payments on balances of $1,500, the minimum payment amounts converge on 1.5% of balance. This is just enough to cover the debt service in the event that ONLY the minimum payment is made, plus some tiny amount (as low as 0.2%) of the balance (this is POP, or payment on principal).

Still, I am no closer to finding out how these minimum payments really are calculated. But whatever it is, it does not appear to be 1% of Balance + the debt service based on the assumption that the ONLY possible payment is the minimum!?

I am clearly exceeding the character limit, so one more time…

What I have observed in Citi’s practices is that minimum payments on balances of $1,000 or less the minimum payment is uniformly $20, no matter what % of the balance this may be. For balances > $1,500, the minimum payment amounts converge on 1.5% of balance. This is just enough to cover the debt service in the event that ONLY the minimum payment is made, plus some tiny amount (as low as 0.2%) of the balance (this is POP, or payment on principal).

Still, this is NOT 1% of balance + a service charge.