Minimum Monthly Payment

Minimum Monthly Payment refers to the smallest amount that one has to pay toward their ongoing credit card loan payments. This provision is a savior for those who are unable to pay the monthly balance in full. Paying the lowest amount helps them avoid additional charges to be incurred on missed repayments.

The nature of the loan, the income of the consumers, and the type of issuer are some of the significant factors that influence the minimum monthly amount to be paid toward the outstanding dues.   

The issuers charge the debtors or cardholders a minimum amount to be paid monthly on the balances accrued to help them maintain a balanced credit history.

A minimum monthly payment is the lowest amount required to be paid to the card issuer when the balance accrued cannot be paid in full. This provision helps debtors maintain good credit scores on their accounts. Though these payments are often associated with credit cards, they can also be associated with other debts owed, such as medical bills, lines of credit, etc. The minimum amount payable every month toward a credit card obligation changes with respect to the total balance that one has to pay to the issuer.

Consumers typically have to pay three amounts when they receive a credit card bill: the current balance, the interest amount, and the flat rate that the issuer might add. The current balance is the total of the most recent bill and the recent charges. The interest amount is the one that one has to pay in addition to the total amount used from the credit card, which is applied to the principal amount every month. On the other hand, the flat rate is the rate levied upon the debtor by the issuer. Based on three figures, the minimum balance is calculated. The statement balance, which reflects the total balance to be paid to the issuer, should be paid monthly. In case the consumer is unable to do so, the minimum payment shall be made instead to avoid unnecessary penalties or late fees.

Consumers must make a minimum monthly payment for credit cards to avoid penalty charges. However, carrying a balance from one period to another will increase the interest rates (unless it's a 0% annual percentage rate). According to the Credit Card Accountability Responsibility and Disclosure Act of 2009, card issuers must issue a minimum payment warning on billing statements. Tracking the schedule of payments helps the individual maintain and build credit scores, which in turn helps them build wealth.

The current balance and the interest rates are used to calculate the cardholder's minimum payments. Monthly payments may vary depending on the balance, additional charges, or fees. There are three primary methods through which the minimum monthly payment for credit cards can be calculated. They are as follows:

• Flat percentage: The calculation in this method is based on a flat percentage of the cardholder's balance: the minimum payment varies based on the balance size, and the rate may be a few percentage points of the total balance.
• Percentage: In this method, the card issuer is charged 1% (typically) of the balance in addition to the cost of interest or fee. It is calculated for the previous month or another prior period. 
• Flat rate: In this method, the issuer charges a flat rate of a few dollars every month, assuming the balance is within a specific limit. If the card balance is below the flat rate, the entire balance will be the minimum payment.
• A minimum monthly payment calculator, in most cases, uses the above pointers to calculate the minimum monthly payment for a credit card.

Let us understand the definition of minimum monthly payment better using the following scenarios:

Example #1

Let's say Bank XYZ has the floor limit, i.e., the lowest minimum payment an individual has to make, set at $50. The bank considers it to determine the minimum payment to be made by a credit card consumer in the event they do not make the monthly balance payment in full.  Dave, a consumer, however, has only $20 available for that month. Hence, he pays that to at least get rid of any kind of penalty charges being imposed on him.

Since the statement balance is less than the floor limit, Dave was expected to pay the total balance as his minimum. As he couldn't do it, penalty charges were imposed on his account, thereby staining his credit records.

Example #2

Suppose Sarah has a credit card balance of $1000, and her interest rate on the card is 18%. The credit card user, however, did not have the money to clear the entire outstanding due at once. Here,

The outstanding balance = $1000 + 18% interest

= $1000+180

= $1180

The credit card issuer, however, calculated the minimum payment for the month toward outstanding dues was 2% of the outstanding balance. Hence, Sarah checked the issuer's app and the balance statement to confirm the minimum monthly payment toward the credit card debt.

She found out that she needed to pay:

2% of the outstanding balance

= 2% of 1000 (as no interest gets added for the minimum payment)

= $20 as the minimum payment for that month.