Business & Finance Credit

How to Calculate Minimum Payment

If you have a credit card, than you are familiar with the common amount, the minimal monthly payment that must be made.
Many customers fall into a trap of paying only the minimum payments, and extend the life of their debt by years when only paying this small amount.
The majority of this amount is charged to interest fees for carrying a balance, rather than being applied to the principal of the debt.
How is your minimum monthly payment calculated?  For most lending institutions, the minimum payment is two to four percent of the balance that is being held on the credit card.
This does not include balances within the purchase grace period, and may also include fees and vary depending on the interest rate that is associated with the credit card.
To calculate minimum payment, credit card companies use some basic formulas.
  The example below will give you a rough estimate of how much interest you will be paying.
If you are carrying a balance of $1,000.
00 on a credit card, the minimum monthly payment would be $20.
00 at the rate of 2%.
At 4%, the monthly payment would be $40.
00.
This minimum payment is applied to the credit card, but how much of the payment is allocated towards the principal, and how much of the payment is allocated towards the interest? To calculate how much of the payment will be attributed to the interest, divide the interest rate, for example 10% by twelve months (.
10/12) and then multiply it by the balance that remains on the card ($1000.
00).
The total of this number is how much will be applied to the interest payments for the credit card, and the remaining is applied to the principal.
If your account is past-due or over limit, there may be other fees associated with the monthly payment.
The majority of lenders and banking institutions charge a fee of $39.
00 each period that the account is over the limit.
If the account is over the limit for three months, this fee could be nearing $120.
00! To avoid these fees, keep the balances well under the limits and ensure that all payments are made on time, each month.
It is important that customers realize the gravity of falling into the minimum payment trap.
Many customers don't realize that paying only the minimum can extend the life of the debt by years! Experts recommend that at least double the minimum monthly payment should be paid on each account, every single month.
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