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.
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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 Information on this page may be out of date.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.