How Are Credit Card Payments Calculated?

While we always have the power to pay more, we certainly cannot pay any less than the minimum payment on our credit card statement every month. But how do credit card companies calculate that minimum payment? The answer varies by credit card company.

While different credit card companies may use different number values to calculate a credit card payment, the basic formula is the same. Credit card companies use your credit card's ending balance to determine the principal payment as well as the interest payment on your card, then add the two together to reveal the minimum payment on your card for that month.

Here is a more in-depth look into that formula to help you do your own calculations.

Things You'll Need

• Calculator Latest credit card statement Access to your credit card company phone number and/or website

Instructions

1. Find your credit card's ending balance. The ending balance is the balance on the credit card at the end of the most recent billing cycle. This is the number used to calculate your minimum payment for that billing cycle.

2. Find your credit card company's formula for calculating the minimum principal payment (not including interest). While many believe the across-the-board rule for minimum payments is to pay three percent of your ending balance, this is not always the case. Credit card companies often employ different methods for calculating minimum payments. Some examples of rules include two percent of the ending balance, the greater of either three percent of the ending balance or $10, or interest plus $10 (not including fees and service charges).

   As an example, if your ending balance is $1,000 and your credit card company calculates your minimum principal payment as 2 percent of the ending balance, then $1,000 multiplied by .02 will give you a minimum principal payment of $20.

3. Calculate the interest payment on your ending balance by first multiplying your ending balance by the credit card's annual interest rate, then dividing that number by 12. For example, if your ending balance is $1,000 and your interest rate is 8.99 percent, you would multiply $1,000 by .0899, which gives you $89.90. This total divided by 12 gives you an interest payment of $7.49 for the month.

4. Add the interest payment (found in Step 3) to the principal payment (found in Step 2) to get your minimum payment for that month. Using the example ending balance of $1,000 and the example interest rate of 8.99 percent, we would add the principal minimum payment of $20 to the interest payment of $7.49 to get a total minimum payment for the month of $27.49.

Tips & Warnings

• If you can't readily uncover your credit card company's methods for calculating principal and interest payments on the company's web site or within the literature that comes with your credit card statement, call the company and ask for an explanation of their methods. Remember that in 2008, percentages used to calculate minimum principal payments on credit cards increased across the board. If you've suddenly found your minimum payments higher than before, this may explain the increase.

• Be sure to add finance charges and fees to the resulting minimum payment you have calculated. Fees can be incurred if you do not pay your bill on time. Finance charges, however, are a bit more nebulous. They can be charged based on a number of different factors, such as only paying the minimum payment or paying late.

Resources

• Read this Article in Spanish