- 1 How Credit Card Minimum Payments Are Calculated (By Issuer)
- 2 How to Calculate Credit Card Interest With Excel
- 3 What Happens If I Only Make The Minimum Payment On My Credit Card?
- 4 Credit Cards: Terms Of Agreement
- 5 Your Small Credit Card Balance Costs More Than You Think
- 5.1 Average credit card debt in America
- 5.2 Calculate credit card interest to understand the danger
- 5.3 How to fight against credit card interest
- 5.4 Don’t be defeated by average credit card debt
How Credit Card Minimum Payments Are Calculated (By Issuer)
You know that each month your credit card company sends you a bill and that each month it requires a “minimum payment” you must make in order to avoid defaulting on the card loan. But how does the credit card company decide what your minimum payment should be?
There is no standard formula for calculating a minimum payment. Each card-issuing bank creates its own formula. Below are the minimum payment formulas for the major U.S. card issuers. For all card issuers, any past due amounts or amounts you’ve charged over your credit limit would also be added to the numbers below.
- American Express: Minimum payment is always at least $35 (unless your balance is under $35, in which case you must pay the complete balance). However, if the amount of the following formula — (interest charges + 1% of current balance) — is over $35, that will be the method for determining your minimum payment.
- Bank of America: Minimum payment is 1% of your balance plus any new interest charges for the month and any late fees (if applicable).
- Barclaycard: Minimum payment is always at least $20 (unless your balance is under $20, in which case you must pay the complete balance). However, if the amount of the following formula — (interest charges + late payment fees + 1% of current balance) — is over $20, that will be the method for determining your minimum payment.
- Capital One: Minimum payment is always at least $25 (unless your balance is under $25, in which case you must pay the complete balance). However, if the amount of the following formula — (interest charges + late payment fees + 1% of current balance) — is over $25, that will be the method for determining your minimum payment.
- Chase: Minimum payment is always at least $25 (unless your balance is under $25, in which case you must pay the complete balance). However, if the amount of the following formula — (interest charges + late payment fees + 1% of current balance) — is over $25, that will be the method for determining your minimum payment.
- Citi: Minimum payment is always at least $20 (unless your balance is under $20, in which case you must pay the complete balance). However, Citi may use either of the following formulas if the calculated result is above $20: The first formula is (interest charges + late payment fees + 1% of current balance). The second formula is 1.5% of the current balance. Whichever of those formulas calculates to the higher amount will be the formula that is used in your case.
- Discover: Minimum payment is always at least $35 (unless your balance is under $35, in which case you must pay the complete balance). However, Discover may use either of the following formulas if the calculated result is above $35: The first formula is ($20 + interest + late payment fees). The second formula is 2% of the current balance. Whichever of those formulas calculates to the higher amount will be the formula that is used in your case.
- Wells Fargo: Minimum payment is always at least $15 (unless your balance is under $15, in which case you must pay the complete balance). However, Wells Fargo may use either of the following formulas if the calculated result is above $15: The first formula is (interest charges + late payment fees + 1% of current balance). The second formula is 2% of the current balance. Whichever of those formulas calculates to the higher amount will be the formula that is used in your case.
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How to Calculate Credit Card Interest With Excel
The annual interest rate on credit cards can be notoriously high. While most consumers would prefer to reduce, or even eliminate, credit card debt, it remains a familiar item in family budgets. Here's how to calculate credit card interest with Excel so you can estimate your cost savings by reducing or eliminating your credit card debt or switching to a card with a lower interest rate. Tips for saving money on credit card interest are also included.
Gathering Data and Setting up Excel Edit
What Happens If I Only Make The Minimum Payment On My Credit Card?
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One of the most important things we consumers can do to do to be sure that we’re on track to building a healthy financial future is to obtain a credit card and use it regularly. For most of us, getting a credit card represents our first opportunity to start building a credit history, so getting our hands on some plastic as soon as possible and using it responsibly will give us a head start on a long life of positive financial habits.
However, while millions of Americans are fulfilling the goal of dutifully using their credit cards and paying them off every month, there are others among us who find themselves succumbing to the Siren song of the minimum balance. After all, we all have a tight month every so often, and at times like this paying the total balance on your card can just seem so optional, especially compared to other bills.
But as easy as it seems to just pay the minimum balance on your credit card bill, the reality is that there are some truly scary consequences to failing to pay off your charges in full every month. Still not convinced? Take a look at these three negative consequences of making minimum payments described below – you can’t afford not to!
Making minimum payments on your credit card is a quick fix to coming up
short on cash for the month, but over time the debt you’ll build up over the course of just a few months of underpaying can really mess up your credit score. This is because 30% of your credit score is determined by how much debt you carry, particularly on revolving credit accounts (such as credit cards). This means that accruing charges on your card and failing to pay them off is like putting a dent in your credit score every month; over time, this adds up to a lot of damage.
The best thing to do is keep track of your spending and make sure that you don’t charge more than you can comfortably pay off at the end of the month. Otherwise, you can expect a nasty surprise the next time you check your credit score.
2. Your monthly bills start to balloon
Most credit card issuers only require a minimum payment of 4-6% of the total balance to be paid every month. However, if you pay only this minimum amount every month and continue to make charges on the card, the total balance on the card is going to rise substantially; in no time, that 4-6% is going to amount to a pretty high figure that you’ll have to fork over every month.
But it’s not only your credit card bills that will shoot up if you only make minimum payments. Thanks to the damage you’ll be doing to your credit score, other monthly obligations – such as insurance payments, loans, even rent or mortgage payments – will be expensive, too. Lenders, landlords, and insurance companies charge people with poor credit more, so it’s important to keep your credit card debt levels down and your credit score high to avoid this added expense.
3. Your credit card costs skyrocket
Paying only minimums on your credit cards is dangerous for a lot of reasons, but probably one of the most obvious because of the interest that’s accruing on the unpaid balance. The average interest rate on a credit card is 15%, so it’s very expensive to fail to pay off your balance in full.
Plus, most credit cards charge a fee for exceeding your credit limit, which is easy to do when you’re paying so little of your bill every month, so be sure to avoid this mistake by making full-sized payments on your card.
Credit cards are helpful tools for building good credit. but don’t give in to the temptation to only make minimum payments, no matter how convenient it might seem. There are serious and expensive consequences to not paying the full bill every month, so be sure keep a close watch on your spending to avoid this trap!
Credit Cards: Terms Of Agreement
- Credit Cards: Introduction
- Credit Cards: A Brief History
- Credit Cards: What Are Credit Cards?
- Credit Cards: Terms Of Agreement
- Credit Cards: Types Of Credit Cards
- Credit Cards: Making Payments
- Credit Cards: Pros And Cons
- Credit Cards: Choosing A Credit Card
- Credit Cards: Conclusion
Annual Percentage Rate
Think of the annual percentage as a way to calculate the cost of credit. It's what you pay the bank for lending you the money shown as an annual percentage rate. So, if your APR is 13.54%, when you divide 13.54 percent by 12 months, you will have a monthly periodic rate of 1.13%.
Your Small Credit Card Balance Costs More Than You Think
How much of a balance do you have on your credit card right now? A few hundred dollars? A thousand? Living in a time of massive student debt, a small credit card balance may not seem like a big deal.
No matter how much you’re carrying on a credit card, that balance can start picking up steam fast. Carrying that balance does not help you build a credit score, as some people believe. When it comes to the perfect balance to carry from month to month, no amount is better than zero.
Read on to find out why you shouldn’t discount the high cost of even the smallest debt.
Average credit card debt in America
The ordinary American carries more than three credit cards with an average credit card debt of anywhere from $1,600 to $6,800 (depending on the cardholder’s age). What’s more, people carrying a balance aren’t necessarily making large strides to pay them off.
According to a report from the CFPB, “In any given month, about 15% of accounts make exactly the minimum payment. Another 19% pay near (and above) the minimum amount, and a third of accounts pay in full. The remainder either pays under the minimum or some intermediate amount between full and near-minimum.”
In other words, 34% of people are either making their minimum payment only or paying just a little bit more than the minimum. Here’s why that’s a problem.
Calculate credit card interest to understand the danger
Thanks to the way issuers calculate credit card interest, sticking to the minimum payment is a recipe for debt. Even the smallest balance can turn into an insurmountable load within a few months or years.
Using a credit card debt calculator, let’s look at an example using an average interest rate of approximately 12.51 to 13.76%.
With a 12% interest rate and a 2% monthly minimum payment, it would take you 70 months to repay a balance of $1,600 making only the minimum payments. On top of that, you’ll pay $630 in interest — bringing the total amount paid on your $1,600 balance all the way up to $2,230.
A credit card balance of $1,600 doesn’t sound like much at first, but more than five years of payments and $600 in interest later, suddenly it’s not so easy to manage.
Keep in mind that we’re working with averages and estimates here. If the time and money spent paying off these balances don’t alarm you, listen up. Many credit cards have interest rates of 20 percent or more. That means the example above is on the very low end of what you might encounter in real life.
How to fight against credit card interest
So what’s the best way to win the fight against credit card interest? Get ahead of it before it grows uncontrollably. Pay off your credit card balances as quickly as you can; keep using your credit card if you want, but pay it in full every month.
I know paying off a credit card balance is easier said than done, but there are steps you can start taking now to do it. Here are three things you can do to get ahead of credit card interest.
1. Get a balance transfer credit card
The first thing to try is a balance transfer credit card. Balance transfer credit cards usually come with a 0% interest rate for the first six months to one year, and they’re used to pay off your existing credit card (or cards).
Giving yourself a chance to make payments with no interest can help you seriously get ahead on your balance. Just make sure you never make a purchase on the new card (as that will come at a higher interest rate) and make a plan to pay it off before the 0% interest offer expires.
2. Ask your credit card issuer to lower your interest
A simple phone call could help you get ahead of credit card debt. Call your credit card issuer and ask them to lower your interest rate. If you have a positive history with them (read: on-time payments), then there’s a good chance they’ll help you out.
I tried this once before when I couldn’t get a balance transfer credit card and managed to get my interest lowered from 24% to 11%. I kept paying more than the minimum and eventually qualified for a balance transfer credit card at 0% for 24 months. With that, I was able to eliminate a $2,000 credit card balance that I’d been fighting for five years.
3. Use the debt avalanche method
Finally, if you’re battling several credit cards and can’t consolidate them with a balance transfer, then it’s time to employ the debt avalanche method. With this, you’ll target your highest interest rate credit card first.
Here’s how it works: Line your credit cards up from the highest to lowest interest rate and number them accordingly. If you’re able to pay more than the minimum payment, apply the extra money to the highest-interest card first while paying the minimum on the rest.
Once the first card is paid off, apply the whole amount you were paying on it to the second one (on top of the minimum). Keep doing that until you’re debt-free.
Don’t be defeated by average credit card debt
It’s easy to feel defeated once you see how long it can take to pay off even the smallest of credit card balances. But don’t let this knowledge defeat you — let it motivate you.
None of us should discount the high cost of small debt. But if you’re already in that boat, you can make headway and pay off that balance once and for all. Try the tips above and stay focused.
With patience and persistence, you can win against the high cost of credit card interest.