Personal Finance

Q&A: How is the minimum payment calculated?

It depends on the type of debt.

Credit Cards
There are 2 main ways credit card minimum payments are calculated: 1) flat percentage and 2) combined percentage, interest, and fees. The best way to show the difference is with an example:

Person A has a credit card balance of $2,000 and an APR of 24%. Their interest charge for the month is 2% or $40 ($2,000 x (24%/12 months)). They have no other fees.

1. Flat Percentage
XYZ Company requires a minimum payment of a flat 3% of the statement balance, so Person A would have a minimum payment of $60 ($40 of interest and $20 going toward the balance). Their new balance would become $1,980 ($2,000 – $20).

2. Combined Percentage, Interest, and Fees
ABC Company requires a minimum payment of 1% of the statement balance plus interest and fees, so Person A would have a minimum payment of $60 ($40 of interest and $20, or 1% of $2,000, going toward the balance). Their new balance would become $1,980 ($2,000 – $20).

So, although they both have the same outcome in this example, that won’t always be the case because they are calculated differently.

Auto Loans
Most auto loans have a predetermined term (usually between 24 and 84 months) that it will be paid off by. There is also an interest rate and initial loan amount that are agreed upon as well. Using a simple auto loan calculator can help you find what the monthly payment would be, given the other variables.

Mortgages
Mortgages are similar to auto loans in that they usually have the same components. Most mortgages have a term of 15 or 30 years, although other options are available. Here is a mortgage calculator.

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