Whether you just applied for your very first credit cards or you have a wallet full of them, it can be very confusing to determine how companies calculate your minimum monthly payments. After you review the information below how your minimum monthly payments are assessed will become crystal clear.
The Basics on Minimum Monthly Payments
Your minimum monthly payments are the lowest total you are allowed to pay towards your balance each billing cycle. Many people believe when you make minimum monthly payments you are eluding the interest that accrues on your total credit card debt. This assumption is false. The only way you do not pay interest on your balance is to pay your entire debt for each billing cycle off.
How Minimum Monthly Payments are Established
There is no set method for determining your minimum monthly payments. Most credit card companies use one of the two most frequently used procedures to create that number. They are:
- By percentage. Some credit card companies set your minimum monthly payments as a specific percentage of the total debt owed. The most commonly used rate has fluctuated over the years, but currently it ranges between 1 percent and 3 percent of the remaining balance.
- Adding charges, percentage rate and interest due. The second most common way used to calculate your minimum monthly payments is to take between 1 percent and 3 percent of the total debt and then add the card’s interest rate with certain fees.
The only way to ascertain which method your credit card companies employ is to review the agreement you enter into when you receive the card. You should look at this paperwork even before you apply for a particular credit card.
The Pitfalls of Minimum Monthly Payments
It is essential to realize that submitting only the minimum monthly payment for each billing cycle is not in your best interests. This practice only ensures it will take an eternity to pay off your debt.
Also, the additional interest will drag you down in the long run. Each month you carry a balance you collect more interest. If you keep using this card while making only minimum monthly payments your total debt will be even larger which generates even more interest and increases the amount of time for you to become debt free. It is a vicious cycle to break free of and can drag your credit score down. When companies see how much debt you are saddled with they might not want to extend any credit to you.
The main moral of the story is to pay as much as you can if not the entire total on your statement each billing cycle. Do not fall into the trap of paying only the minimum monthly payments because it will negatively impact your financial future.