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If you’re committed to paying more than the minimum on your credit card bill each month, you’ve got the right idea. But you may have noticed that you’re dealing with a moving target, as minimum payments sometimes get higher with every billing cycle. So why does your credit card minimum payment keep rising? Let’s find out.
How your minimum payment is calculated
First, it’s important to have a basic understanding of how your minimum payment is calculated. This varies a bit from issuer to issuer, but usually your minimum is determined in one of the following ways:
As a percentage of what you owe (usually 1%-3%).
As a percentage of what you owe, plus interest and fees you’ve incurred.
Nerd note: Keep in mind that most issuers also have a minimum payment of $20-$35. So if neither of the two calculations above produces a dollar amount equal to the minimum, this is what you’ll be charged. Also, if you’ve missed payments, the amount you’re behind on will usually be rolled into your minimum.
Sometimes, an issuer will use a combination of these calculations to determine your minimum payment. For example, the following is from a sample Cardmember Agreement used by Discover:
“The Minimum Payment Due will be any amount past due plus the greater of:
2% of the New Balance shown on your billing statement; or
any Interest Charges and Late Fee shown on your billing statement, plus $20."
If your minimum keeps rising, there are a few possible explanations
In general, you should interpret a minimum payment that’s rising month over month as a sign that you’re not using your credit card responsibly. Usually, a minimum payment is growing for one (or possibly some combination of) the following reasons:
You’re charging more – If your issuer is taking a percentage of your outstanding balance to calculate your minimum payment, charging more will cause this figure to rise.
For instance, if you usually charge $1,000 to your card each month and your issuer charges 2% of the outstanding balance as a minimum, yours will be $20. But if your spending starts to rise and you’re now habitually charging $2,000 per month, your minimum will puff up to $40.
You’re incurring interest – Most credit cards carry double-digit interest rates, so if you’re carrying a balance, these charges are getting tacked onto your minimum every month. Although it probably won’t pinch too much initially, over the course of several billing cycles your minimum could get very high.
You’re incurring fees – Habitually paying your credit card bill late, using cash advances or taking any other type of action that results in a fee could also cause your minimum payment to skyrocket. Most issuers roll these charges into your minimum until they’re paid off, and will continue to tack them on as you incur them.
You’re behind on your payments – If you didn’t make your minimum payment last month, it will likely be added to your minimum payment the following month. If you continue to miss payments, your minimum will continue to rise.
Tips for taming your minimum
Before discussing tips to keep your minimum payment at bay, it’s important to remember that paying just the minimum on your credit card is never a good idea. The only way to avoid getting hit with interest is to pay off your balance in full each month, which is an absolutely essential part of being an effective credit card user.
With that in mind, here are a few strategies for keeping your minimum payment under control:
Pay your bill on time every month. This will help you avoid having multiple minimums pile up. Plus, you’ll be keeping your credit score in good shape.
Keep a budget and track your spending. This will prevent you from charging more than you can afford to pay off in one month.
If you’re already in credit card debt, pay it off. If you don’t, interest will keep accruing and your minimum payment will keep rising.
Avoid fees. If you have a hard time remembering when your credit card bill is due, sign up for text or email alerts so that you won’t get hit with a late fee. Don’t take cash advances, and if you travel abroad frequently, get a card that charges no foreign transaction fee.
The bottom line: Rising minimum payments usually signal a problem with credit card habits. Use the Nerds’ tips above to keep your minimum – and your finances – in line.