Lesson 6 of 25 · 6 min

Minimum-payment arithmetic

The minimum is interest plus a thin slice of principal, sized to leave most of the balance standing.

A common minimum-payment formula is the greater of $25 and 1 percent of the balance plus that month's interest. The cash that leaves is therefore the month's accrual plus a thin slice of principal. Most of the balance is still standing after the payment posts.

Tallow Yard Credit shows $3,120 at an illustrative 24.99 percent. Monthly interest is $3,120 × 0.2499 ÷ 12 = $64.97. One percent of the balance is $31.20. The minimum is $64.97 + $31.20 = $96.17, which is greater than $25, so $96.17 is the figure. Of that $96.17, $64.97 is this month's time-cost and $31.20 is principal. After the payment the balance is $3,120 − $31.20 = $3,088.80, plus whatever the next cycle then adds.

Track 9 lesson 3 prices a shortfall three ways and shows a cure that can be smaller than the gap it is pointed at. The minimum is that shape on a card: a payment large enough to cover the interest and a slice, not large enough to retire the claim. Lesson 3 of this track already showed what unpaid interest does when it joins the principal. The minimum is the formula that decides how much of each month's charge is prevented from joining.

The minimum is interest plus 1 percent, floored at $25. It is a size, not a schedule that clears the balance on a stated date.

Key terms

Minimum payment: On this formula, the greater of $25 and 1 percent of the balance plus that month's interest.
Principal slice: The 1 percent of balance inside the minimum. The part that actually reduces the claim.
Interest leg of the minimum: This month's accrual, included in the minimum so that unpaid interest need not capitalise — if the minimum is paid.

Worked example

One percent plus the month, floored at twenty-five

Tallow Yard Credit. Balance $3,120. Illustrative 24.99 percent APR. Formula: greater of $25 and 1 percent of balance plus monthly interest.

Monthly interest: $64.97
1 percent of balance: $31.20
Sum: $96.17
Floor: $25
Principal retired if the minimum is paid: $31.20

The $96.17 is a month of interest plus a 1 percent slice. $3,088.80 of the claim is still standing.

Check yourself

A Wick & Pell balance of $2,480 at an illustrative 21.99 percent APR uses the same formula: greater of $25 and 1 percent of the balance plus monthly interest. What is the minimum, and how much of it is principal?

The minimum is a payment sized to the interest plus a thin slice of principal, the everyday version of a cure that is smaller than the shortfall Track 9 lesson 3 prices three ways. Open The same shortfall stated in collateral and in cash →

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.