What is a Credit Card Minimum Payment

by John_S on January 24, 2011

The credit card minimum payment is the required amount payable on a credit card balance before your financial company charges you a late payment fee. Purchases made by using a credit card have to be paid on a monthly basis, but the total due amount may not be paid in full.  Card issuers allow customers to pay a certain percentage of the due amount as to maintain serviceability.

Calculation of Minimum Payment

The minimum payment will depend on the agreement the credit card holder and the company entered into. At the account registration, the agreement will specify the minimum payment that is due every month. This amount is generally based on a certain percentage of the balance owed. For example, if the minimum rate is computed at a rate of 2 percent a month, a $500.00 balance will require a minimum payment of $10.00. The percentage of required minimum payment depends on factors such as credit score and credit limit.

Covering the Minimum Payment

It is important to pay the minimum or an amount in excess of it in order to avoid additional fees. Late payment charges can significantly lower the credit score or credit worthiness of the borrower, thus casting a blow on his credibility.

However, even if covering the minimum helps avoid late charges, it is still best to pay more than this amount. Keep in mind that any unpaid balance will accrue interest and increase your debt. As long as the outstanding balance stays unpaid, the interest continues to accumulate, thus adding debt to debt. In the long run, minimum payments only create potential financial troubles in the future.

Paying More than Minimum

Borrowers who pay more than the minimum help lower interest rate charges and speed up the payment of the overall debt. Bear in mind that this practice will work in reducing your debt only when you do it on a regular basis. One way to check if an increase in the amount of your monthly payments can lower debt is to search for a credit card debt calculator. This simple tool is easy to use and illustrates why covering the minimum payments only is a bad idea.

Better yet, you can pay in full before the next billing period and avoid interest charges. Paying the full amount during the grace period will help you avoid a more serious financial concern – debt.

Minimum Payment in Canada

Credit card issuers use different methods to calculate minimum monthly payments. For instance, at Toronto Dominion it is 2 percent of the ending balance, the American Express Gold Card comes with 3 percent, while Presidents Choice MasterCard goes with 2.2 percent of the ending balance.

Avoiding the Danger of Minimum Payments

It is wise to make purchases you can pay in full before they accrue interest. Or, at least, make sure you earn more money (get a side job or turn your hobby into a money making machine) to speed up the process of getting rid of the debt.

To reduce credit card problems, you might consider some of the following: avoid credit cards that come with annual fees; keep only one credit card; in case you have to carry a balance, it is best to seek out a credit card with a low interest rate; avoid reward cards as they go with higher annual fees; and, of course, pay off your balance in full and in a timely manner.

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