Credit Card Minimum Payment: Everything You Need to Know
- The credit card minimum payment is the smallest amount you’re allowed to pay every month.
- There are three main methods for setting a minimum payment for credit cards.
- Making only the minimum payment can keep you in debt for decades.
What is the minimum payment on a credit card? It’s the smallest amount you can send in each month to be considered current on your account. Low minimums can make it easy to afford your credit card, but they also maximize the cost of everything you charge. This article covers what you need to know about minimum payments on credit card accounts.
How Do Credit Card Companies Calculate Your Minimum Payment?
Credit card issuers determine credit card minimum payments in a variety of ways:
As a percentage of your credit card balance
Your credit card balance is the total amount you currently owe. You can always choose to pay off that balance in full. However, many consumers choose to extend repayment over a longer time. Credit card issuers set a minimum payment for each statement to make sure customers pay a reasonable amount.
That minimum may be based on a percentage of your balance, usually 1% to 3%. In that case, the bigger your balance is, the more you will have to pay each month.
Still, because the minimum is based on a small percentage of your balance, it should usually be very affordable.
As a percentage of your balance plus new fees and interest
A credit card company may choose to start with a percentage of your balance and then add any fees or interest charged to your account since the most recent statement.
This ensures that your payments keep up with any new charges from the credit card company.
This method makes your minimum payments grow more quickly as your balance increases. That’s because the percentage used to calculate the minimum will be applied to a larger balance, plus you will incur higher interest charges on that balance.
As a flat amount
Rather than calculating a minimum as a percentage of your balance, the credit card company may simply charge a flat dollar amount - for example, $25 per statement.
This method often kicks in if calculating a minimum based on a percentage of your balance falls below a certain threshold.
For example, if you have a balance of $100 and the minimum payment is 3% of the balance, you would owe just $3.
It’s not very efficient for you or the credit card company to process such small payments, so a flat dollar amount might kick in. Think of that flat amount as a "minimum minimum" payment.
However, a minimum payment cannot exceed the total amount you owe. Your minimum payment is the lesser of your balance or the flat amount.
Can the Way My Minimum Payment is Calculated Change?
Yes. The same credit card may use more than one of the above methods to calculate your minimum balance, depending on the situation. Things like the size of your balance and whether or not you incur any fees or interest charges in the current statement cycle may come into play.
Also, the card issuer might tweak your credit card minimum payment according to your payment history. If you’re running a large balance and have a shaky payment history, the credit card company might increase your minimum so you pay the money back faster.
Why Is There a Minimum Payment on Your Credit Card?
Credit card minimum payments are easier to understand if you think about how credit card companies make money.
Credit cards charge interest based on the amount you owe. The more money you owe, the more interest the card issuer charges you. So it’s in the best interests of the credit card company to have you continue to owe them money.
At the same time, the card company doesn’t make money unless you actually pay it back. So, it puts a minimum payment in place to steadily collect some of the interest you owe.
For credit card companies, this is a balancing act. They want to keep your balance up to continue charging you interest, but they also want to collect on some of those charges.
To strike this balance, credit card companies charge minimum payments that are designed to be quite small. They don't want your balance to decline too quickly for the credit card company to earn plenty of interest -- at your expense.
When you think about it that way, you realize that small minimum payments may sound user-friendly, but they’re not. They’re designed to stretch out the time it takes to pay back what you owe so that the credit card company can make more money.
How Much is the Minimum Payment on a Credit Card Supposed to Be?
Your credit card agreement should disclose how the company calculates your minimum payment. If you have any doubts about the size of your minimum, refer back to that agreement.
Always remember that the minimum is the least amount you have to pay, but you can always pay more. You can pay your balance off in full at any time, or at least pay it down faster by paying more than the minimum. You will pay less interest over time.
Why Does My Credit Card Say No Minimum Payment Due?
If there’s no minimum payment, it’s likely due to one of two things:
You don’t have any balance owed on your credit card
Your total balance owed is so insignificant that the credit card company doesn't require you to pay any portion of it in this statement cycle.
What Happens if You Only Pay the Minimum Payment?
Because minimum payments are so tiny, it will take a long time (potentially decades) to pay off your balance. That's because as your balance shrinks, so does your minimum payment.
In fact, if you charge more in new purchases on a card than the amount of your minimum payment, the amount you owe would increase even if you make that payment.
Remember, the longer it takes you to pay off what you owe, the more interest you’ll pay in the long run. So paying only the minimum is an expensive choice to make.
To help consumers realize this, Federal Reserve rules require each credit card statement to show the impact of making only your minimum payment. This disclosure must contain the following:
How long it would take you to pay off your balance by making only the minimum payment each month. Note that this assumes no new charges on your credit card. Any additional purchases would extend your repayment.
How much interest you would pay if you made only the minimum payments.
An example of how much faster you could pay off your debt and how much you would save in interest by making larger payments.
How Much Should You Pay on Your Credit Card?
You should pay at least the minimum with each statement. Otherwise, you will likely incur fees and interest charges and get bad marks on your credit report.
If you can afford it, though, you should pay more than the minimum so that you will be charged less interest on your balance.
To figure out how much more than the minimum you should pay, look at all your expenses for the month. Start with essential living expenses, and then include minimum payments due on any debt you owe.
If you have money left over after paying all these necessary expenses, line up your debts from highest to lowest interest rates.
Since credit card rates are usually higher than rates on things like mortgages, student loans, and car loans, chances are your credit card debt will be at the top of this list.
That means you can save the most by putting any extra money toward paying down that high-interest debt.
What if You Can’t Afford Your Minimum Payment?
Minimum payments are designed to be a relatively small amount of the total you owe. But sometimes, due to setbacks or other financial obligations, you don’t have the money to make those payments. What then?
Most importantly, don’t just ignore the problem. Late payments will look bad on your credit history. They also could prompt your credit card company to raise your interest rate and/or charge late penalties.
Plus, you do have options. There are a few types of debt relief that can not only help you with your immediate payments but also get you on a long-term path to get your debt under control.
Debt Relief Options if You Can’t Keep Up with Your Credit Card Payments
Here are some examples of debt relief options:
Negotiate with the credit card company to lower your minimum payment. If they see this as the best course towards eventually getting paid back while also keeping you as a paying customer, credit card companies may go along with this.
See if you can qualify for a lower interest rate. If you’re in a temporary financial squeeze but otherwise have good credit and solid payment history, you may get the credit card company to lower your rate. This could help with your month-to-month minimum payments and the total amount of interest you have to pay in the long run.
Ask for a temporary break from making payments. It's called a forbearance. Prove that your problems are temporary and that you’ll eventually make up for missed payments. In that case, the credit card company may agree to suspend your minimum payments for a few months, so you avoid more penalties bad marks on your credit report.
Get the credit card company to reduce the amount you owe. This is known as debt settlement, and it comes at a steep price. You almost certainly won’t be able to use that credit card again, plus the damage it does to your credit report could make it very hard to get credit for years to come. On top of that, the IRS considers settled debt to be taxable income.
Take Control of Your Credit Card Payments
How do you determine which debt relief approach is right for you and get the credit card company to agree with it?
You can try to negotiate with the credit card companies yourself. See if they’ll reduce your minimum payment, give you a break from making payments for a while, or grant you some other form of debt relief.
Nonprofit debt counselors can help you formulate a plan to get back on track with your debts. Remember that even nonprofit debt counselors may have to charge something for this service.
Debt relief companies can take the added step of negotiating with your creditors on your behalf. They charge some percentage of the amount under negotiation for this service.
Look into each of these options to see which is best for your situation. Remember, doing nothing will lead to more trouble. Actively pursuing some form of debt relief can be the first step towards getting your credit card debt under control.