Ever wonder how minimum credit card payments are computed or if a balance transfer is really worth it? The answers often seem locked in complicated mathematical computations reminiscent of high school trigonometry. That’s unfortunate since knowing what your monthly minimum payment before you splurge on a new purchase or open a new credit card can be the difference between landing in financial hot water and being able to make ends meet.
Since few consumers are eager to head back to the hallowed halls of high school, here’s how to easily compute what your minimum payments might be and whether or not a balance transfer offer is worth it.
Calculating Your Minimum Balance
Your minimum payment due on a credit card is the least amount you must pay by your credit card’s specified due date. The exact amount of any minimum payment is a moving target because it’s based on your unpaid balance at the close of your billing cycle. The higher your balance, the higher your minimum monthly payment.
If you fail to make the minimum payment by the due date –even if you’re one day late—your credit card issuer will likely assess a late fee in the neighborhood of $35. You will also incur interest on the unpaid amount.
Miss a payment altogether (or make one 30 days late) and the credit card issuer is going to report your missed payment to the credit bureaus. For someone with good credit this may cause a severe hit to your score, which will vary depending on your existing credit quality. Once you clear the account, assuming you do so, you’ll get back some but not all of the points. If you allow the account to go 90 days past due, FICO will consider that to be a major delinquency and the damage escalates.
Remember, delinquencies stay on your report for 7 years, so even minor mess-ups can have big consequences.
Let’s say you open a new credit card that carries an APR of 18 percent with a $1,500 purchase. As Credit Sesame contributing credit expert John Ulzheimer says, “A minimum payment due is normally between two and five percent of the outstanding balance.”
Here’s how that formula works if you have an opening balance of $1,500 on a card with 18 percent APR:
(1,500 balance x 18% APR = $1,770) x 2% = $35 minimum payment.
However the Office of the Comptroller, under the U.S. Department of Treasury, issued a formula for calculating the minimum monthly payment that many credit card issuers now rely on in order to minimize the risk they won’t be paid in full for the balance. This formula significantly increases the size of a minimum payment.
Here’s how the Office of the Comptroller’s formula works if you have a balance of $1,500 with 18 percent APR:
(account balance x APR) + (account balance x 1 percent) + (any applicable transaction fees. For this example no fees will be included) = (minimum monthly payment).
The equation would be: 270 + 15 + 0 = $285 due that month.
Credit card interest is very expensive to carry because of the APR or interest rates you’re expected to pay. If you’re carrying any balance and paying interest you should at least consider a balance transfer opportunity offered you.
The formula for vetting balance transfer offers is quite simple and hinges on APRs.
A good deal: The introductory APR offered is lower than the one you’re currently paying, but the normal APR increases to what you’re currently paying after the introductory period expires. This will save you some money in the short term on interest that you can put toward the balance.
A better deal: The APR offered is lower than what you’re currently paying AND so is the rate offered after the introductory period expires.
The best deal: The APR offered is 0% introductory APR on balance transfers, 0% introductory APR on new purchases, and there’s no balance transfer fee. This is the trifecta needed to maximize a balance transfer and knock down credit card debt.