CALCULATING CREDIT CARD MINIMUM PAYMENTSHow to Calculate Credit Card Minimum Payments
It can be difficult to understand how your monthly credit card
statements are calculated and how the credit card companies calculate
your monthly minimums. Many banks that issue credit cards lure
consumers in with low introductory rates that suddenly escalate to
incredible levels after an initial trial period ends. Furthermore,
there are numerous other fees to consider including: annual membership
fees, finances charges, late fees, over the limit fees, and other
penalties. Lastly, interest rates can fluctuate creating more
confusion.
If you have one or more credit cards, with different fees and
varying interest rates it can be almost impossible to plan out a
monthly budget for yourself based on what the monthly minimum payments
will be. Actually there is a mathematical formula used by financial
institutions to determine what your monthly minimum payment will be.
Depending on the method your bank uses, you will either make a
payment based on your average daily balance, your balance based on
adjusted payments, charges and interest rates or your previous balance.
These methods may favor either the card holder, the card issuer or
maintain a fair balance between the two. Whether you are applying for
a new card, consolidating your balances, or simply trying to figure out
how much you’re supposed to pay every month, it is wise to read the
small print on your card member statement to see which method that bank
utilizes.
The method most beneficial to the consumer or cardholder is the
adjusted balance system. With this simple formula the bank will add any
new charges to your previous monthly balance, subtract payments and
then take that sum and multiply it by the monthly interest charge. The
monthly interest charge is essentially your interest rate divided by
12. So, if you have a 24% interest rate, your monthly interest charge
is 2%. The resulting total is the minimum amount you will be required
to pay that month.
Conversely, the system that favors the bank or card issuer is known
as the previous balance system. With this method the financial
institution will multiply the balance from the previous month by the
monthly interest payment, regardless of any payments you have since
made. This means that even if you have made a large payment that month,
you will still be penalized for the previous month’s balance.
The formula that appears to run down the middle is known as the
average daily balance method. Your average daily balance (monthly
balance divided by average days in the month) is added to any accrued
charges as they occur. Any payments that are made are subtracted.
Then, the average of each daily total is calculated and the resulting
sum is multiplied by the monthly interest rate.
Now factor in late fees, over-the-limit fees and annual membership
rates and it’s even more difficult to calculate a budget around monthly
credit card payments.
It is extremely important that you review every charge on your
credit card statement and calculate the minimum monthly payment due
before sending in the payment. Never take the word of the issuing bank
that this is the amount of money that you owe. While the charges on the
statement are typically correct, there still can be a mistake. In the
case of an error, either on charges made or in the amount of your
minimum payment, you normally have a limited amount of time to appeal.
After that time elapses, you will probably be stuck paying the
money, whether you owe it or not. Most banks allow 60 days to dispute
a charge or error and must provide you with a reply within 30 days. If
the result of the investigation determines an error has been made, you
will typically receive a credit on your statement. If the investigation
reveals no mistake, you will be responsible for paying the bill.
If you do not understand something on your statement, call
customer service and ask them to explain it. Understanding the billing
system or formula of your credit card company and how they calculate
your bills, can assist you in keeping future charges down and
maintaining your monthly budget.
If you do have too much credit card debt and are having difficulty
paying even the monthly minimums, you should contact Professional Debt
Advisors for a free debt consultation.
We can help you reduce your debt balances and
potentially have you debt free in as little as 12 months depending on your specific situation. You can call
The Debt Reduction Group toll-free at 866-559-DEBT (3328) or fill out
the free consultation form on the right. We look forward to helping
you become debt free.
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