Credit Card Minimum Monthly Payments
If you’re new to credit cards and trying to find the best deal, it can be confusing comparing offers. Credit card issuers use a lot of financial lingoes that can often be difficult to understand.
If you plan to keep a balance on the credit card from month to month you must understand the minimum monthly payment due. The minimum payment is not always clearly outlined and can be difficult to find, however, it is a very important part of understanding whether you can afford a credit card or not. So as a consumer, how do you find out what the minimum payment on a credit card might be?
Firstly, let’s look at the definition of minimum monthly payment. This is the smallest amount of money you can pay back on an outstanding balance of the credit card each month without incurring additional fees or negative repercussions on your credit score. For example, if your outstanding balance is R1,000 and the credit card company requires a minimum of 2% paid each month, the minimum monthly payment would be R20.
How is the payment calculated?
There is no standard way of calculating a minimum payment. Each credit card provider will use their own unique formula and criteria to determine the minimum monthly payment. There are two common methods consumers can use to calculate this payment and we will outline them below.
- Percentage method – Here, the credit card issuer will calculate the minimum payment as a flat percentage of the outstanding balance. Again, taking the above example where a flat 2% minimum monthly payment was required on the outstanding balance of R1,000 – meaning the minimum payment was R20.
- Percentage + Interest + Fees method – If you have a credit card where interest is payable and fees may be owed, you should include these in the calculation for the minimum monthly payment (in addition to the flat percentage rate). For example, if you incurred a late fee from a previous payment, that can be added to next month’s minimum monthly payment. Using the above example again, if a late fee of R50 was incurred, the minimum payments for this month would be the flat 2% (R20) + R50 = R70.
The only way to fully understand the minimum monthly payments that will be due on a credit card is to carefully read the terms and conditions attached to a credit card offer. A credit card issuer must outline all fees, charges and minimum monthly payments within the terms and conditions, so this is a very good source for understanding whether you can afford the credit card.
Always pay more than the minimum monthly payment
It is not recommended that you only pay back the minimum monthly payment. Firstly, only paying back the minimum monthly amount will mean that it takes you a long time to repay your debt on the credit card. Secondly, you need to consider the interest charges each month. By only paying back the minimum amount you will accumulate more interest over time, which could cost you a lot of money.
Take the example of buying a laptop worth R25,000 on a credit card with an APR of 15%, and only paying the minimum amount each month of 2%. This will take you 79 months to fully repay the debt and you will accrue R12,830 in interest – over half the original price of the item!
What’s more, if you continue to spend on the card when only making minimum monthly payments, you will not only get hit with interest charges but you will also be piling further debt on to yourself.
A final note on minimum monthly payments
0% Interest rate credit cards are usually conditional on you meeting the minimum monthly payments for the length of the offer. If you fail to make a payment, you will incur charges and the 0% interest period will likely end.
In conclusion, although it is recommended that you pay back more than the minimum amount each month, you are much better off paying back the minimum than nothing at all. If you can control your spending habits to allow you to pay off the full balance each month, you will be in a good financial spot.