monthly credit card paymentOne of the questions we receive a lot, especially from those looking to transfer a balance, is what the minimum monthly credit card payment will be. While we always encourage people to avoid interest altogether by paying off their balance in full each month, sometimes you can’t help it and you wind up carrying a balance. If you are planning to transfer a sizeable amount to a new credit card (or you know that you’ll be making purchases which you won’t be paying off immediately), then you might find yourself asking what the minimum monthly payment will be. As simple as it might seem, this is actually a rather complicated subject, since all credit card issuers and banks calculate monthly credit card payments differently. Here’s everything you need to know about how your minimum amount due is calculated.

What is a minimum monthly credit card payment?

You can think of your credit card as a type of loan, because that’s what it really is — whenever you use your card, you are essentially borrowing the money from your issuer or bank, with the promise to repay it. At the end of each pay period, whatever amount you’ve charged on your card must be paid back. You can choose to pay your card off as you go or when your payment is due, or you can forego that and pay the minimum amount due. This amount will vary from issuer to issuer, and it depends entirely on your card’s balance, so it can change month to month. If you’ve made a recent large payment, you might even see that your monthly minimum payment is $0 — which means you could technically not make a payment that month, and you’d be in the clear. Other factors that influence the minimum monthly payment are interest, any fees you may have incurred (such as a late payment fee from a prior month) and changes in the market rate which impact your variable APR.

How can I figure out what my monthly payment will be?

Since there aren’t specific laws or guidelines on how credit card issuers must calculate minimum monthly payments, each one is able to use its own proprietary formula. The best way to determine how your minimum monthly credit card payment is calculated is to read your cardmember agreement, which is mailed to you when you first open a new credit card. This spells out the exact details of how your minimum payments are calculated. In general, you can expect your credit card issuer to calculate your payment as 2% to 5% of your total balance owed (plus any of the extras we mentioned previously, like interest or fees).

Why it’s important to avoid paying only the minimum due

Although there’s nothing inherently wrong with paying only your minimum monthly credit card payment, unless you are in the midst of a promotional 0% intro APR period, then you are going to pay far more than just your balance over time. That’s because paying the minimum means you are going to carry a balance to the next month and accrue interest. You could wind up spending hundreds of dollars more than you should, especially considering variable APR means your interest rate could increase due to a fluctuation in the market or mistakes on your part, like a late or missed payment that results in a penalty APR being applied to your account. It’s a good practice to either pay off your purchases as you go, or plan to pay off your entire balance in full when your due date arrives. This will ensure that you don’t trap yourself in a cycle of credit card debt and keep you from paying more than you should in the long run. If you do find yourself in a bind, making sure you’re paying the minimum will keep you out of trouble, but you should take time to reconsider your budget to get yourself back to paying more than the minimum, if not the full balance, each month.

Credit cards don’t have to be scary or confusing, and you can follow our credit cards blog for help understanding how they work and the information necessary to decide which ones are right for your wallet.