Credit cards can be very convenient and a lifesaver when you need to pay for a product or service but don't have enough cash. However, if you don't keep track of your expenses, you might be surprised with a high balance at the end of the billing cycle. For many people, the credit card minimum payment can be a convenient option.
The minimum payment on credit cards refers to the lowest amount you can pay from your total balance during a billing cycle, without being penalized. But it still has some downsides, though. For instance, you might end up paying interest on the remaining balance over time, and taking longer to reduce your bill.
In this article, we'll explain everything you need to know about credit card minimum payments—including how they're calculated, how to find yours, and the potential financial consequences of making minimum payments.
What is the minimum payment on a credit card?
The credit card minimum payment is the smallest amount a cardholder can pay at the end of each monthly billing cycle. Credit card companies offer this alternative to help clients that may not be able to pay the balance in full to avoid late fees and other penalties. By making minimum payments, you're able to remain in good standing with creditors, avoiding a stain on your credit report, which could potentially lead to a low credit score.
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How to calculate minimum credit card payment?
Calculating minimum payment on a credit card is the issuer's responsibility. Every month, you'll receive a statement showing your full balance and the minimum amount you need to pay.
If you're curious about how this minimum is calculated, keep in mind that it depends on the issuer, as the method can vary between companies.
While your balance is always the base for the calculation, some issuers take a small, flat percentage of it, while others add interest charges. According to the credit bureau Experian, this percentage generally ranges from 2% to 4%, though the interest rate varies by issuer.
“Most credit cards compound interest daily, meaning the interest you are charged one day becomes part of the balance that you are charged interest on the next day,” says Amy Coroso, certified financial education instructor and author of Planning Your Retirement Life.
Let's say your credit card issuer calculates the minimum payment at 2% of your credit card balance. If you had a balance of $500, the minimum payment would be $10. To know exactly how your credit card minimum amount is calculated, check its terms and conditions on your account. You may find it on your account's app or at the issuer's website (for example, Wells Fargo has a disclosure page for each of their credit cards.)
If you're unable to find it by yourself, contact customer service and ask for guidance or a copy of the document. Another tool that can help is a credit card minimum payment calculator, which helps you estimate the minimum amount you're likely to be charged in current or next billing cycles.
Why would you make a minimum credit card payment?
The principal benefit of making minimum payments on credit cards is avoiding late fees and a stained credit report in case you don't have the money to pay the balance in full at its payment due date.
If you carry debt on multiple credit cards, paying the minimum on at least some can also be a good strategy to tackle your debts. “I recommend making minimum payments if a debt payoff plan is in place for multiple cards,” says Coroso, who recommends the debt snowball method.
This method consists in listing your debts from lowest to highest balance and focusing on paying off the lowest first. “In the meantime, make the minimum payments on the other debts,” she says. “Once the first debt is paid, take the amount that you were paying monthly to debt #1, and add it to the minimum payment that was being made to debt #2. Once debt #2 is paid off, apply to debt #3, and so on until all balances have been paid to zero.”
This might also help: Which Credit Card Should I Pay Off First? The Best Way to Manage Multiple Credit Cards
What happens if I only pay the minimum payment on my credit card?
If you only make minimum payments on your credit card it will take longer to get rid of your debt—especially if you add new charges between billing cycles. Since credit card issuers can charge interest in the remaining balance, as well as increase your annual percentage rate (APR), you may also end up paying far more money than what you originally owed.
“This is based on the average daily balance, and the card's APR,” Coroso says. “To calculate the daily rate, divide the APR by 365. If you have a 25% APR, the daily rate would be 0.068%.”
The Credit CARD Act, a consumer protection law passed in 2009, obligates credit card issuers to disclose the cost of only making minimum payments. You can find this information on your monthly statement, in a section labeled “Minimum Payment Warning.”
With your bill increasing exponentially, another downside of only making minimum payments is that you can end up owing more than your credit limit. “In this case there would be no more available credit on that card,” Coroso says.
“If the card is over the limit, the issuer could close the account and declare it delinquent,” she says. “This also has a negative impact on credit reports and credit scores.”
Will minimum payments hurt my credit score?
Minimum payments can impact your credit score if your credit utilization rate is over 30%. For those not familiar with the term, your credit utilization rate is the percentage of your total credit limit that is currently in use. Scoring models like FICO and VantageScore 3.0 take it into consideration to assess how you manage debt and determine your score.
“If your total credit limit across all credit cards is $6000, and you have a balance of $3000, then your credit utilization ratio is 50%,” Coroso says. In this scenario, a credit card minimum payment of any amount between 2% and 4% doesn't lower your utilization rate to the desired 30% or less.
Of course, having good credit doesn't solely depend on your credit utilization rate alone. Other factors are taken into account and your payment history is one of the most important components, making up 35% of your FICO score and 40% of your VantageScore 3.0. Amounts owed comes second on the list of most impactful components for FICO (30%), while VantageScore separates utilization (20%) and balances (11%), totaling 31% of your credit score.
This might also interest you: 8 Dangers of Credit Cards: What to Watch Out For and How to Avoid
Why you should make more than the minimum payment
If you came this far, you learned that making minimum credit card payments can cost you more money than you originally owed and also negatively affect your credit score. Therefore, consider making more than minimum payments whenever possible. This will help you tackle your debt faster and get your financial health in good shape.
Now you're probably wondering what happens if you pay more than the minimum balance on your credit card each month, right? The outcome is basically the same: You'll lower your bill by a certain amount, however you might still get charged interest on the remaining amount (though probably less than if you'd only made a minimum payment).
Of course, those details ultimately depend on your credit card issuer’s specific policies and charging system. So check the terms and conditions of your credit account. The only way to completely avoid paying interest is paying your credit card balance in full every month.
“I rarely recommend making minimum payments on a credit card,” Coroso says. “Often the minimum payment does not cover the interest on the monthly statement, so the cardholder continues to accrue interest charges, including compound interest.”
FAQs
What is the minimum payment on a $500 credit card?
There's no fixed amount based on the balance alone—it’s up to card issuers to determine the minimum payment. For instance, if they calculate the minimum payment as a straight percentage of 4% of your balance, it would be $20. But if they also charge 10% of interest on your total balance, the minimum payment would be $70. You can find the calculus your credit card issuer uses in the terms and conditions of your credit account.
How long to pay off $5,000 credit card with minimum payment?
Depending on how your credit card issuer calculates your minimum payment, it could take years to pay off a $5,000, since you're likely going to be charged interest on the remaining balance. The credit card issuer is required to tell you how long it will take to pay off your current balance if you only make minimum payments. You can find this information on your statement, in a box called “Minimum Payment Warning.”
Why is my credit card minimum payment so high?
If your credit card minimum payment is high, it’s likely because your balance is high. The minimum payment is a percentage of your balance, usually ranging from 2% to 4%. So, the higher your bill, the higher is the minimum payment. Most credit card companies also charge interest, which can also increase your minimum payment amount.
What does minimum payment mean on a credit card statement?
The minimum payment on your credit card statement indicates the smallest amount you can pay that month. This is an alternative offered to credit card holders who may not be able to pay the balance in full, but want to remain in good standing with the credit card issuer and credit bureaus.
How much do I need to pay on my credit card to avoid interest?
Paying your credit card balance in full and on time each month is the only way to avoid paying interest. If you opt for minimum payments or miss your credit card payment, the issuer can charge interest and late fees.
If I pay the minimum credit card payment do I get charged interest?
Most likely, yes. Generally, credit card issuers charge interest in the remaining balance after a minimum payment. Check your credit account terms and conditions to know your credit card issuer's policies regarding minimum payments.
If I pay the minimum on my credit card, can I use it again?
If you have available credit, yes. However, if you end up owing more than your credit limit because of accruing interest fees, you won't be able to use your card until you make enough payments to lower your balance. In these situations, credit card issuers can also close the account. Check the terms and conditions of your account for more information.
What happens if I don't pay the minimum due on my credit card?
If you don't pay the minimum or any other amount on your credit card on its due date, you'll get charged a late fee and interest on your debt. If you delay the payment for more than 30 days, the credit card issuer will report it to credit bureaus, such as Experian, TransUnion, and Equifax, which will likely result in a lower credit score.