Are Finance Charges Included in Minimum Payments?

The minimum payment due on your credit card statement is usually calculated as a percentage of the overall balance, but depending on the credit card company it can include finance charges.1

Credit card companies are free to formulate minimum payments, so there is no universal rule as to whether these charges are included in the minimum payments.2 Discover, for example, sets minimum payments at $35, or 2% of the full balance, or $20 plus interest and any fees.

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What are Finance Charges?

Finance charges are typically assessed when you do not pay the full balance on your statement. Some finance charges may occur immediately, for example, on cash advances and balance transfers, and some credit cards have generous grace periods where no finance charges are accessed on purchases if you pay your entire balance by the payment due date. Finance charges represent what you are paying for credit. They include interest payments, late fees and other charges.3

You should know what you are being charged for credit so that you can compare financing options, and so you can understand what it will take to pay down your balance.

How Is a Minimum Payment Calculated?

Minimum payments offer consumers flexibility during hard times. They give people an option to pay less then their outstanding balance on their monthly bill so that they can have more money to allocated elsewhere. But it is wise to pay more than the minimum whenever possible.

Minimum payments are calculated in two ways:2

1. Most major credit card companies start with a base number, typically $15 to $35.

2. Most major credit card companies calculate a percentage of the full balance due (usually 1% to 2%), then add interest and any other fees.

The minimum payment is then based on the higher number of these two methods.

What Happens if I Only Make the Minimum Payment?

It will take years, or maybe even decades, to pay off your debt if you only make the minimum payments. It can also make borrowing quite expensive since you’ll be paying finance charges each month. Additionally, carrying a high balance for a long period of time can hurt your credit score and may result in credit card companies charging you a higher interest rate.4 That’s why most credit card borrowers pay more each month than the minimum due.5

Resources:

1. http://www.experian.com/blogs/ask-experian/2013/08/20/finance-charges-and-minimum-credit-card-payments/

2. http://www.creditcards.com/credit-card-news/minimum-credit_card-payments-survey-1276.php

3. http://www.creditcards.com/credit-card-news/minimum-credit-card-payments-1267.php

4. http://www.nerdwallet.com/blog/credit-cards/credit-score/minimum-payment-credit-card/

5. http://www.nerdwallet.com/blog/finance/paying-more-minimum-on-your-credit-card/

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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