August 21, 2024

Understanding the Minimum Payment on Your Credit Card

Credit cards do more than help you pay for groceries. They’re powerful financial tools that help you build credit and manage your cash, often earning rewards in the process. The catch is that you have to pay a bill every month — and the interest can be steep.

In a perfect world, you’d pay off your credit card balance in full every time, which avoids interest charges and keeps your credit score stable. But this world isn’t perfect. And sometimes, you have to carry a balance.

Most credit cards ask you to make a minimum payment every month, even if you owe a lot. Here’s a guide to what the minimum payment on a credit card is, the ways it can impact your financial health, and advice for adjusting and making that minimum deposit.

What’s the minimum payment on a credit card?

A minimum payment is the smallest amount you can pay on your credit card bill while still keeping the debt in good standing. Think of it as a small gesture that tells your credit card issuer that you know the debt is there and you're working on it. In exchange, the credit card company doesn't charge additional fees or penalties like they would for a missed payment.

How are credit card minimum payments calculated?

The bank calculates how much the minimum payment on your credit card is. Usually, it’s a percentage of your balance. The exact methodology varies between credit card companies, but here’s a quick guide to two primary methods:

Percentage of balance

The percentage of balance method sets your minimum payment based on a percentage, typically 2–3%, of your total balance. For example, say a person owes $1,000, and their minimum payment is 2% of that balance. The lowest amount they could apply is $20.

Percentage plus interest and fees

Some minimum payments are a percentage plus interest and fees. This method usually involves a lower starting percentage, often around 1%. The difference is that lenders require cardholders also to pay any interest charges and fees accrued that month. On a $1,000 balance with a $20 interest charge and a 1% minimum payment percentage, the cardholder would have to pay $30.

Additional factors

Here are some other factors that could impact your minimum payment:

Floor amounts. Many cards have floor amounts, which are essentially minimum payments for the minimum payment, like $10 or $25. A person's minimum payment will never be lower than this floor amount set by the credit card issuer, even if the percentage method leads to a lower number.
Low balances. Some banks ask you to pay small balances in full rather than with a minimum payment.
Additional fees. Depending on the situation, banks might also add past-due amounts and other fees to your payments.

What happens if you pay less than the minimum payment on a credit card?

When you pay less than the required minimum, the bank sees it as a missed payment. While it can feel good to pay something rather than nothing, communicate with your bank if you’re in a pinch instead of going below the minimum. That way, you can agree on a solution instead of taking the risk.

Here are some of the repercussions you might face when you pay less than required:

Credit score damage. Unless you provide the rest of the minimum payment within 30 days of your due date, failing to pay will bring down your credit score. That’s because it's considered a missed payment.
Penalty rate. Some cards switch you to a higher interest rate once you miss a payment. The more you miss, the more you pay, even if you get back on track eventually.
Late fees. Most credit card companies charge additional penalty fees when you miss payments, with some issuers adding this fee to the minimum payment.
Increased balance. Missing a payment also means you aren't working toward your debt. It’ll only grow.

What happens if you only pay the minimum on your credit card?

You can technically pay the minimum without repercussions. But if your bill comes out to more than the minimum every time, you’re only building up more debt.

Minimum payments give you flexibility around how much you can pay. In situations where you need to redirect funds for other purposes, you don’t have to pay off the full balance, but you still maintain a good relationship with your lender by giving them the minimum. The catch to this short-term flexibility is that it means interest charges accumulate, generating more debt.

If you don’t have enough to pay more than the minimum, look for the “Minimum payment warning” on your credit card statement. The Credit CARD Act of 2009 requires credit card companies to outline how long it'll take you to pay off debt when only paying the minimum payment, plus how much you’ll pay with interest. These two numbers help you gauge if paying only the minimum is a worthwhile trade-off for you and your financial health.

3 tips to pay your credit card's minimum payments

Don’t worry if you find yourself only paying your minimum a few months in a row. There are ways to either increase your income or better your spending habits to do better next time. Here are a few tips:

1. Make biweekly payments. Consider making payments every two weeks, or whenever your pay period lands, instead of every month. For some, dividing their minimum payment in two helps make the bill more manageable.

2. Set up automatic payments. If you struggle to remember payment due dates, set up automatic deposits. Automatic payments make sure you won't miss a bill.

3. Increase your income. Getting a part-time job, doing some freelancing, or joining apps like Uber and DoorDash can be excellent ways to generate a little extra income to pay down credit cards or work toward other financial goals.

How to lower the minimum payment on a credit card

While only paying the minimum balance on your credit card isn't an ideal long-term solution, many people find themselves in situations where it’s the best they can do for the time being. If you’re in this situation — or if you just want to save some money temporarily — try to lower your minimum payment.

Here are a few possible ways to earn a lower minimum:

Minimize card use. If possible, use your credit card as little as possible. Making lots of big purchases while only paying the minimum balance means the number only continues to grow. If your floor amount is $25, spend $25–$30 to avoid accumulating a large bill.
Negotiate. When your minimum payment is too much of a challenge to cover every month, call your credit card company and explain the situation. Creditors don't want you to default. It's better to be honest as early as possible to see if they can adjust your payment, interest rate, or due date to better accommodate your situation.
Transfer the balance. Many credit cards offer promotions on balance transfers, including 0% interest for a period of time. If you have any other cards, see if a balance transfer promotion is available. Taking advantage of one could help reduce your payment or get a better interest rate.
Consolidate your debt. Debt consolidation is when you take out another loan or credit card and use it to pay off multiple debts. Then, you only have one bill and one interest rate, leading to lower payments over time. If you have multiple credit cards with high balances, this may be a good option for you. You can also search for a loan or card with a lower minimum payment.

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