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How Is a Credit Card’s Minimum Payment Calculated?

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Last updated on June 28, 2020

In an ideal world, you would use your credit card for everyday spending, rack up rewards or cash back, and pay off the balance in full every month. But in reality, a number of circumstances could render you unable to pay off your full credit card balance every month.

If you’ve ever been in a situation where you’ve spent more on your credit card than you can afford to pay off, it’s important to continue to make at least your credit card minimum payment. Your minimum payment is the smallest payment you must make on your credit card to preserve your credit score and avoid incurring extra fees and penalties.

How Are Credit Card Minimum Payments Calculated?

How much will your credit card minimum payment be? The answer is complicated, because in Canada most credit card providers calculate your minimum payment based on one of two formulas. If you need a quick answer, you can use a credit card minimum payment calculator to find out approximately what your minimum payment should be, but we’ve also laid out the math behind the two formulas below.

Flat Dollar Amount

If you have a relatively small unpaid balance (say, less than $1000), your credit card’s minimum monthly payment might be a flat rate, usually $10, sometimes plus interest and any unpaid fees.

Percentage of Overall Balance

If you have a larger balance, for example, $5,000, your credit card’s minimum monthly payment will likely be a percentage of the outstanding balance, usually 3%.

The minimum payment formula that applies to your credit card depends on the size of your balance, but it will always be whatever is the larger result of the two formulas listed above.

For example, if you have a $100 balance on your credit card, your minimum payment would be $10 using the flat rate method, or 3% of $100, which is $3. Since the minimum payment on your statement is always the larger of the two options, it will be $10.

But if you have a $5,000 balance, your minimum payment using each calculation would be $10 using the flat rate method, or 3% of $5,000, which is $150. Since the minimum monthly payment on your credit card statement would be the larger of the two formulas, it will be $150.

How to Find Your Minimum Payment Terms

Your minimum payment and its due date are issued monthly on your credit card statement. If you receive paper statements in the mail, it is available on that document. If you bank online, you can find your minimum monthly payment in your online portal, or by downloading your monthly statement in PDF form. If you can’t find the information you are looking for, call your credit card’s customer service line.

How Do Past-Due Payments Affect Your Minimum Payment?

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If you miss a minimum payment, your credit card issuer is entitled to take one or more of the below actions, all of which will negatively affect your finances:

  • Increase your interest rate
  • Report your missed payments to the credit bureau, damaging your credit score
  • Withdraw a promotional interest rate
  • Cancel your credit card

Some of these measures will affect your minimum payment. For example, if your interest rate goes up, the monthly interest that is added to your balance increases. Since your minimum payment is sometimes calculated as a percentage of your balance, it will also increase.

Making Minimum Payments vs. Paying More Than the Minimum

While you should always make at least the minimum payment on your credit card, it’s a good idea to prioritize paying even more than the minimum. Paying more than the minimum has many benefits, but most importantly, it will dramatically reduce the amount of interest you pay on your credit card balance and decrease the amount of time it will take to pay off your balance in full.

For example, if you have a $5,000 balance on a credit card charging 19.99% interest, your minimum monthly payment will probably be $150. If you make only the minimum payment on your credit card, it will take you more than four years to pay off the balance, and during that time you’ll pay $2,357 in interest. That’s over half of the principal!

Alternatively, if you pay $350 per month toward that debt, the balance will be paid down in full in one year and five months, and you’ll pay $758 in interest—a savings of $1,599!

If You’re Struggling to Pay Off Your Credit Card Balance

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Paying off your credit card in full every month can be a challenge, and the unfortunate truth is that most Canadians carry credit card debt of some amount. If you’re struggling with a high-interest debt load, there are a number of options you can explore to reduce the burden.

One common strategy for speeding up the debt repayment process and minimizing interest payments is the use of a balance transfer credit card. These cards offer very low interest rates (as low as 0%) for a promotional period, usually between three to 12 months.

Be aware that after a balance transfer card’s promotional period expires, the interest rate goes up, and your remaining balance will be subject to these higher rates. Know what a balance transfer card’s post-promotional interest rate is before you apply, and minimize your risk by considering a card that has both a low promotional and post-promotional rate.

Author Bio

Jordann Brown
Jordann Brown is a freelance personal finance writer whose areas of expertise include debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC.

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