(Ask a Question) Why does overpaying one month not reduce my minimum payment for the next month? When I paid $50 more than the minimum payment, the next month’s payment was almost the same ($4 cheaper). Why does the monthly payment not drop by more since I basically paid a big chunk of it early.
(Response) It might make perfect sense for you to expect your next minimum payment requirement to drop if you overpaid on this month’s payment. The Sears credit card used to actually work that way. Previously on the Sears card, your overpayment would also be applied as a prepayment to the next month.
The logic goes that if your minimum payment is $300 yet you pay $450, that your next month’s minimum payment should only be about $148-150. However, you can expect the next monthly payment to still be almost $300, perhaps $298 or so assuming you are not still making purchases on the account. The reason for this is that minimum payment calculations follow specific rules.
Minimum payments on credit cards are regulated, and your creditors must ensure that the minimum payment requirements allow for you to be able to repay the debt within a reasonable period of time. What is considered reasonable is up for debate.
Minimum payments on most credit card products are calculated using a similar formula. It is usually the total finance charges on the account for that billing cycle plus 1% of the balance. You will notice that the formula completely ignores the amount of payment (or overpayment) from the previous month. Instead, it uses the current balance of the account to measure the payment portion that is added to the finance charges.
So by making a large payment on your card, you do somewhat reduce the next month’s minimum payment requirement. Just understand it is lower due to reduced finance charges owed on a smaller balance as well as a point being added based on the smaller balance.
Some debtors find this out the hard way, thinking that they should make 2 payments at once while they have the money on hand. However, this just leads to a missed payment and late fees owed on the second month, plus a negative credit rating as a result of the skipped payment.
Just remember that you are responsible for a minimum payment every month until the balance reaches zero. Overpayments are great for knocking down your debt balance, so long as it does not cause you to miss payments.
Tags: minimum, overpayments