What To Know About Credit Card Minimum Payments

Credit card issuers charge cardholders a minimum monthly payment against any balances accrued. The way minimum payments are calculated can vary from issuer to issuer, but a few common methods are used among the largest issuers. Making the minimum payment is enough to get by, but cardholders should always pay off the full balance each month if possible to avoid accruing interest.

What Is a Credit Card Minimum Payment?

The minimum monthly payment on a credit card is the lowest amount that a cardholder needs to pay each month to maintain good standing with the credit card issuer. While it’s not mandatory to pay off the entire balance, it’s advisable to do so to avoid accruing interest charges. Paying the balance in full before the due date helps prevent additional interest and keeps the credit card account in good financial health.

Making a minimum payment gives a cardholder time to pay off a balance but interest will start to accrue and make the balance larger. Cardholders who carry a balance should discontinue charging to their card and focus on paying off the current balance to avoid falling deeper into debt. If the cardholder has a zero balance, there will not be a minimum payment on monthly statements.

How Do Minimum Payments Affect Credit?

A minimum monthly payment is rarely equal to the card’s total balance. If cardholders make only the minimum payment and continue to charge the card, interest can accrue quickly and balances will increase. In such a case, not only will the minimum payment increase, a cardholder is potentially damaging their credit score.

As a credit card balance increases, so will the credit utilization rate (the percentage of a credit line owed to all issuers). Financial experts recommend cardholders keep their credit utilization rates under 30%. A utilization rate greater than 30% can lead to a decrease in the cardholder’s credit score.

The best practice is to resist spending more than you can afford, and pay off balances every month in full. By doing this, you can avoid interest and keep your credit utilization rate as low as possible. If this isn’t possible, you should at least attempt to pay more than the minimum every month to slow down interest accrual and lower the balance overall. If this isn’t possible and you can only make the minimum payment each month, it’s best to cease making charges to the card and focus on paying off the balance.

On-time payments are important as well—too many missed payments can not only negatively affect a credit score but also lead to higher minimum payments due to late fees.

Where Is the Minimum Payment Located?

Cardholders can find their minimum monthly payment written on a paper statement or emphasized in an online account. Cardholders can also call an issuer to ask about a balance and the minimum amount due or to make a payment over the phone.

Thanks to the CARD Act of 2009, each credit card statement should include a table showing how long it would take a cardholder to pay off the balance at the current interest rate if they were to only make the minimum payment every month. Knowing how long it will take and how much will be spent on interest is helpful to making a payment plan.

How Is the Minimum Payment Calculated?

A cardholder’s minimum payment is based on the current balance and interest rate. The minimum can change from month to month based on how the balance changes, plus any additional fees or interest charges from the prior period.

There are three main ways that a card issuer calculates the minimum payment:

• A flat percentage of the cardholder’s balance. This rate may be a few percentage points of the total balance. In this case, the minimum payment will vary based on the size of the balance.
• A percentage of the cardholder’s balance plus interest or fees from the prior period. Here the card issuer may charge 1% of the balance plus the cost of any interest or fees charged for the last monthly period.
• A flat rate. The card issuer may charge a simple flat rate as low as $35 due every month (as long as the balance isn’t above a certain threshold). If the balance is below the flat rate, then the minimum payment will be the entire balance.

The minimum payment can increase or decrease each month depending on the cardholder’s standing and the factors mentioned above.

How Is the Minimum Payment Applied to the Balance?

Credit card payments are typically applied to charges on the card as they appear on monthly statements. It’s possible to have more than one type of balance on a credit card, like a balance for purchases and another for balance transfers. Cardholders who pay more than the minimum payment every month will generally have their payment applied to the balance with the highest interest rate first, then each subsequent balance with a lower rate.

Cardholders who carry a monthly balance and accrue interest should be aware of how payments are applied. Issuers usually first apply a payment to the interest itself, then toward the balance.

There’s a nightmare scenario that many cardholders experience: a cardholder carries a balance, continues to make purchases, accumulates interest charges and pays only the minimum each month. Before realizing, monthly payments are applied 100% to interest charges rather than to the original balance. This is how debt can snowball into something daunting and uncontrollable.

To avoid this scenario, pay the balance every month or, if that’s not possible, pay as much as possible more than the minimum. Cease making charges to the card until the entire balance is paid off—keeping a monthly balance is a fast way to feed debt.

Bottom Line

While cardholders can choose to make only the minimum payment every month, it’s best practice to spend wisely and pay off the full balance each and every month. The minimum payment is the lowest amount a credit card issuer will accept but it’s not designed to help cardholders pay off a balance without paying interest. Credit card issuers are required to inform cardholders how long it will take to pay off the current balance at the current interest rate if paying only the minimum. Use this information wisely to avoid snowballing into debt and ruining your credit score.