Minimum Payment Formula:
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The minimum payment calculation determines the smallest amount you must pay on your credit card balance each month to avoid penalties. Credit card companies typically calculate this as the greater of a percentage of your balance or a fixed minimum amount.
The calculator uses the minimum payment formula:
Where:
Explanation: The calculation ensures you pay either the percentage of your balance or the fixed minimum amount, whichever is greater.
Details: Understanding minimum payments helps with budgeting and shows how long it would take to pay off debt making only minimum payments (typically many years with substantial interest).
Tips: Enter your current credit card balance, the percentage rate your issuer uses (typically 1-3%), and the minimum fixed amount (often $25-$35). All values must be positive numbers.
Q1: Why do credit cards have minimum payments?
A: Minimum payments ensure creditors receive some payment each month while giving borrowers flexibility, though paying only the minimum leads to high interest costs.
Q2: Is it bad to only pay the minimum?
A: Yes, paying only the minimum means you'll pay much more in interest and take much longer to pay off your balance.
Q3: How is the percentage rate determined?
A: The rate is set by your credit card issuer, typically ranging from 1% to 3% of your balance.
Q4: Does the minimum payment change?
A: Yes, as your balance changes, the percentage-based portion of your minimum payment will change accordingly.
Q5: Should I pay more than the minimum?
A: Absolutely. Paying more than the minimum reduces interest costs and helps pay off debt faster. Aim to pay the full balance each month if possible.