If you are a newbie with Credit Cards, chances are that you may not be fully aware about how your card’s monthly billing process works. There are different factors which are taken into account by banks before they calculate the minimum amount due in a month on your Credit Card. If you wish to understand this complex process, let’s help you do that with ease!
How billing cycle works?
Billing cycle, in simple terms, is the duration for which you are liable to pay the outstanding amount on your Credit Card. For instance, if the billing period on your card is 5th March-4th April, then the bill gets generated on the 4th of every month. This bill will include all the expenses that you have made on your Credit Card in the last 30 days. If you purchase anything on the 5th of April, then that amount automatically gets included in the next month’s billing cycle.
Grace period on Credit Card
Grace period refers to the number of days during which you have the liberty to pay your last bill. During that period, you need not pay any interest on your Credit Card. For instance, if the grace period on your Credit Card’s billing is for 15 days, then you enjoy those many interest-free days from the recent billing date.
As per the earlier example, if your billing date is the 4th of every month and you enjoy a 15-day grace period, then you need to pay the bill before the 19th of every month. After the 19th, the interest rate will be added to your Credit Card bill.
Adding on to that, you can enjoy a maximum of 55 days of an interest-free period!
What’s a minimum payment?
In simple terms, minimum payment (or “minimum due”) is the least amount of money you are allowed to pay each month towards the total balance due on your Credit Card. If you make this minimum monthly payment, you will not incur any late-fee charges or trigger negative points on your Credit Score history.
How’s minimum amount calculated?
Though banks use different ways to calculate the minimum amount due on your Credit Card, there are two popular ways of doing this calculation:
- Percentage method: Some Credit Card companies calculate your minimum balance as a flat percentage on your total amount. This percentage may vary from one bank to the other but generally ranges between 12-14%.
- Percentage +interest +fees method: Another popular way of calculating the minimum amount due on your Credit Card is by adding the base percentage, plus processing and late fees (if applicable), plus outstanding interest rate charges.
So that’s how the minimum balance due on your Credit Card is calculated on a monthly basis by your bank. However, do remember that it’s never advisable to pay only the minimum amount due on your Credit Card as it not only increases the interest amount but also has a negative impact on your Credit Score.