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Making Minimum Credit Card Payments: Explained

Making Minimum Credit Card Payments: Explained

*Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated Oct 25, 2018. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.

Have you ever been tempted to just make the minimum payment when you receive your credit card bill?

When you receive your credit card bill each month, there will be a minimum payment and a statement balance. While we recommend paying your full balance, we understand that may not always be possible. It’s important that you make at least the minimum payment. This simple action prevents you from incurring several fees and is the first step toward paying off your balance. Plus, making a minimum payment is the first step to paying off your statement balance.

In this post, we’ll review minimum payments, how they’re calculated and the consequences of failing to make them.

How your minimum payment is determined

A minimum payment is a percentage of your total statement balance, and the smallest amount of money you have to pay each month to keep your account current. Banks calculate minimum payments differently, but many set a “floor” — most commonly $25, according to the Consumer Financial Protection Bureau — which is the lowest minimum payment you’ll be charged.

If your statement balance is less than the floor, you’ll be required to pay the entire balance. For example, if the floor is $25 but your balance is $7.95, your minimum payment will equal your statement balance at $7.95.

There are two main ways that issuers calculate minimum payments, according to the CFPB. Below, we list the two calculations, what percent your minimum payment is of your total statement balance and which issuers typically use each calculation.

Note: If the calculation yields an amount lower than your issuer’s floor (see above), your minimum payment will be the floor.

Calculation Percentage (of Your Total Statement Balance) Most Used By
As a percentage of the total statement balance, including finance charges 2% for credit unions

5% and 7% for subprime banks

3% and 4% for large banks

Credit unions and subprime banks
As a percentage of the total statement balance, excluding finance charges, and then adding the total finance charge to the minimum payment due 1% Large issuers

Why should I make the minimum payment?

If you forget or choose not to make your minimum payment, you could be looking at a bunch of fees and penalties. Late payment fees, a penalty APR and interest charges are the fees you may incur. A penalty APR is an especially big setback since you’ll be hit with an APR that’s higher than your regular purchase APR, and it’ll apply to all purchases and balances you carry — sometimes indefinitely.

Plus, if you’re taking advantage of a promotional offer such as an intro 0% APR, you risk the bank canceling that offer. We strongly recommend you always make at least your minimum payment, but pay more than the minimum whenever possible. We’ll explain why below.

What happens when you only make the minimum payment

You may think it’s OK to only make minimum credit card payments, but it’s not a wise choice in the long run. You’ll end up racking up interest charges — unless you’re taking advantage of an intro 0% APR period — and falling into debt. The example below shows why it’s so important to make more than the minimum payment.

For this example, we’ll look at my last bill where I had a statement balance of $364:

  • My minimum payment was $25
  • My APR was 16.24% variable

If I only paid the minimum payment of $25 each month, it would take me 17 months to pay off my balance. At the end of the 17 months, I would have paid an estimated $408. Keep in mind my original statement balance was $364. So by only making the minimum payment, I ended up paying $44 in interest.

Now, I have a relatively low APR, so if we take the same example but raise my APR to 25.24% variable (which is the highest for my credit card), my interest charges would increase to $75. Similarly, a higher balance would increase interest charges as well.

Here’s a table breaking down the specifics if I only paid the minimum:

Statement Balance APR Minimum Payment I Would Pay Off the Statement Balance In About I Would End Up Paying an Estimated Total of The Total Interest I Paid Would Be About
$364 16.24% (v) $25 17 months $408 $44
$364 25.24% (v) $25 18 months $439 $75

There may be times when you’re unable to pay off your statement balance in full. In those cases, it can be OK to pay only the minimum for a few months, but make sure you pay your balance in full as soon as you have the funds available. Remember: The longer you carry a balance, the more interest you’ll accrue.

Best practice: Pay more than the minimum

If you only make the minimum payment each month, you will end up carrying a balance month to month and fall into debt. Initially, it may seem like a good idea to make only the minimum payment if you’re short of money, but it’s a bad habit. For example, if you have a $25 minimum payment but a $500 balance, you’ll still owe the bank $475 plus interest and fees.

“The primary job for anyone with a credit card is to pay your balance off as soon as possible,” CompareCards Chief Industry Analyst Matt Schulz said. “Ideally, you’d pay it in full at the end of every month, but life happens and that’s not always possible. Still, it’s incredibly important to pay well over the minimum. Otherwise, the math starts to work against you really quickly.”

It’s important to have a good payment history, and paying on time and in full each month will positively affect your credit. We realize it may not be possible for you to pay each statement in full. In that case, pay as much as you can afford, whether it’s the minimum payment plus $10 or $100 — anything to help lower your balance.

If you continually carry a balance, it may be time to re-evaluate your spending and see if you can cut costs. You can also consider balance transfer cards or cards offering intro 0% periods for purchases to avoid interest on balances. Just beware that you will still need to make your minimum payment.

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September 9, 2019