What you need to know about a credit card minimum payment

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In a Nutshell

Making only the minimum payment on your credit card might seem easier with your current budget, but it can add years to how long it takes to pay off your balance.
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If you have a high credit card balance, paying only the minimum payment may be tempting.

Unfortunately, credit card debt can snowball easily. Emergencies can pop up, like car repairs and vet visits. And now you’re carrying a balance on your card. So, what happens if you only pay the credit card minimum payment?

Linda Sherry, director of national priorities at Consumer Action explains that “a minimum payment on a credit card is the least amount you must pay by the due date to avoid a late fee.”

While paying less than your full balance may save you money this month, it costs you more in the long run.

If you pay the credit card minimum payment, you won’t have to pay a late fee. But you’ll still have to pay interest on the balance you didn’t pay.

And credit card interest rates run high: According to November 2023 data from the Federal Reserve, the national average credit card APR was 21.47%. If you continue to make minimum payments, the compounding interest can make it difficult to pay off your credit card debt.

Sherry says, “You’ll pay more interest the longer you make minimum payments because your balance is still subject to finance charges until it’s paid off.”

Each credit card company has its own minimum payment policy

The minimum payment calculation is based on your full balance, including interest from not paying your balance in full. With some credit card companies, if your balance is lower than the set minimum payment, that balance amount will be your minimum payment. But policies vary by company.

How does a credit card company determine my minimum payment?

The credit card minimum payment is determined by the credit card issuer. It is generally is based on the larger of 1) a set dollar amount or 2) the sum of a percentage of the new balance, and, if applicable, interest charges and late fees.

How paying only the credit card minimum payment costs you more

Keep in mind that if you pay only the minimum payment each month, it’ll take much longer to pay off your credit card balance.

That’s because a lot of cards come with high interest rates. Paying only the minimum will cause you to pay more in interest and extend the term of your debt, according to Bruce McClary at National Federation for Credit Counseling.

For example, if you have a credit card balance of $7,800 with an interest rate of 15% and you make a 3% minimum payment of $234 each month, it would take 44 months to repay the debt entirely — plus you’d pay a staggering $2,353 in interest.

Does making only the minimum payment affect my credit?

As long as you’re paying your credit card minimum payment on time, it reflects positively on your payment history. But your credit scores may still be affected when you pay only the minimum each month, according to Sherry.

“It might hurt some aspects of credit scoring analytics, such as credit utilization,” Sherry says. “If you only pay the minimum, you’re going to take longer to pay off outstanding balances.”

Outstanding balances play a part in your credit utilization, which is the percentage of credit you’re using out of the total amount of credit available to you.

For example, if you have two cards with limits totaling $7,000 and you’ve used $500 of your total credit, your credit utilization is 7%.

Total debt is “highly influential” in determining a VantageScore credit score, according to VantageScore Solutions, LLC.

You can try various balance scenarios on Credit Karma’s Credit Score Simulator to get an idea of how increasing or decreasing your balances might affect your credit utilization and your credit score on your TransUnion credit report. Just keep in mind that this is an educational tool and not a predictor of future score changes.

Whether only paying the minimum payment has an impact on your credit utilization depends on how the lender establishes the minimum payment and your use of the credit card or line of credit, says Nancy Bistritz-Balkan, a spokeswoman for major credit bureau Equifax.

What are your minimum payment rights?

In 2009, the U.S. Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act. This is a law that aims to establish fair and transparent practices within the credit card industry.

Because of the CARD Act, credit card issuers must now include the following minimum payment disclosures in statements:

  • A snapshot comparison of how long it’ll take to pay off your credit card balance if you only make minimum payments versus the payment needed each month to pay off the balance in three years. They must also include the total cost (interest and principal) of repaying the balance in three years.
  • A toll-free number where the cardholder can obtain information about access to credit counseling and debt management services.

If you pay more than your minimum payment on a card, your issuer is required to apply any money in excess of the credit card minimum payment to the balance with the highest APR and any remaining portion to the other balances in descending order based on the APR.

Say you have two balances on one card: A purchases balance with a 15% APR and a balance transfer balance with a 10% APR. Any amount you pay in excess of your minimum payment will be applied to the purchases balance first, which has the highest APR.

As a result of these regulations, credit card customers can make more informed decisions, including the amount they want to pay on their credit card balances each month.

Bottom line

While it may be tempting to pay credit card minimum payments to save money now, this can add time to how long it’ll take to pay off the balance. Plus you’ll pay more in interest. If you’re able, pay more than the minimum payment each month to lower your balance and keep your credit utilization rate low.

About the author: Deb Hipp is a freelance writer with a bachelor’s degree in English and creative writing from the University of Missouri-Kansas City. When she’s not writing about personal finance and news, she enjoys traveling to seas… Read more.