What to know about credit card
minimum payments
As a credit card user, one of the important concepts to understand is your credit card minimum payment. The minimum payment is the lowest amount of your credit card balance that you’re responsible to pay each month to keep your account in good standing. However, making only the minimum payment may not be the best strategy in paying down your debt.
Learn more about credit card minimum payments, how they’re calculated, and how paying them can impact the length and cost of your debt payoff and, potentially, your credit score.
What is a credit card balance?
Your credit card balance is the total amount you owe on your credit card. It includes all your unpaid transactions at any given moment, plus any applicable interest charges and fees. It’s different from your monthly statement balance, which is the balance on the closing date of your billing cycle.
Credit card balances are revolving lines of credit, so they fluctuate. They go up as you use the card for purchases, and down when you make payments. While you aren’t obligated to pay your full balance each month, you are required to pay at least the minimum credit card payment. If you miss your payment date, you will be charged a late fee. And if you carry a balance to the next billing cycle, you’ll incur interest charges based on your annual percentage rate (APR).
Responsible card users monitor their balance and try not to let it get too close to their credit limit. The higher your balance is relative to your limit, the more credit you’re using, known as your credit utilization ratio. Your ability to keep credit utilization low is one of the top factors that determine your credit score, according to Experian.
What is a credit card minimum payment?
A credit card minimum payment is the lowest amount you’re required to pay on your credit card bill. Paying the minimum lets you pay less than the total amount you owe. While paying the minimum keeps your account in good standing, paying more than the minimum is better for your overall credit health, as noted by Experian.
Your credit card minimum payment amount can be found on your credit card statement, along with the due date and total balance. Your payment can be any amount you choose, as long as it’s the minimum payment or higher. If your goal is to keep your credit card debt in check, you may want to consider paying more than the minimum.
How is a minimum credit card payment calculated?
Credit card issuers have their own methods for calculating minimum credit card payments, and you can find this information in the card’s terms and conditions. Typically, card companies calculate minimum payment amounts by using a percentage of the full balance plus any interest charges and fees.
In some cases, a credit card company may charge a flat minimum payment, such as $25, or a flat percentage of your total owed.
No matter which method the credit card issuer uses, the minimum credit card payment is typically much smaller than the total you owe.
Do minimum credit card payments change?
Minimum credit card payments are determined by the credit issuer. In most cases, they’re based on the total balance. It’s likely that your transactions, interest charges, and fees will vary from month to month, so your minimum credit card payments are likely to vary, too.
You can log into your credit card account’s online platform or mobile app any time to see your next minimum payment due.
How long does it take to pay off an account balance with only minimum payments?
If you’re only making minimum payments, it may take significantly longer to pay off your entire balance. By law, credit card issuers must tell you exactly how long—and the total cost including interest—on every credit card statement.
This information, known as a minimum payment warning, is presented as a table. It compares the length of repayment and the total cost when making minimum payments versus paying larger amounts toward your account balance. This information clearly illustrates to cardholders how only making minimum payments will keep them in debt longer and may cost them more.
Credit cards may have high interest rates, and interest charges keep accruing when you carry a balance. Because of these two factors, making only the minimum payment may not decrease the principal balance by a significant amount.
Do minimum credit card payments affect your credit score?
Making only minimum credit card payments does not directly affect your credit score. However, it will have an impact on the two most important factors in credit score calculations—payment history and credit utilization—as explained by Experian.
Making on time monthly payments accounts for 35% of your credit score, so it’s connected heavily to your overall credit health. Credit card companies report your on-time payments to the credit bureaus (Experian, Equifax, and TransUnion) each month, so this positive activity becomes part of your credit history in your credit reports.
However, if you regularly pay only the minimum amount due, you may end up with consistently high credit utilization, which can have a negative impact on your credit score. Your credit utilization ratio accounts for 30% of your credit score, and it demonstrates your debt management ability. So, paying off as much of your balance as possible—beyond the minimum amount due—may help you protect your credit score.
Summary
Choosing to make just the minimum credit card payment on your account may provide you with some financial wiggle room when you’re not able to pay your credit card balance in full. However, when paying only the minimum, this strategy may make it more difficult to pay down debt.
Instead, paying more than the minimum payment will likely bring your principal balance down faster and allow you to pay less interest. Over time, paying more than the minimum and keeping your balances as close to zero as possible may help you maximize the credit utilization component of your credit score.
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