Credit Card Minimum Payments and the Benefits of Paying More

Making only the minimum payment on your credit card may keep your account in good standing and let you avoid late fees, but that’s about all it does. It won’t get you very far toward reducing your credit card debt.

If you’re experiencing a financial emergency, paying only the minimum is a valid survival strategy for conserving cash. But as a long-term strategy, only making the minimum payment is a recipe for serious trouble. Here’s why.

What is a credit card minimum payment?

A credit card minimum payment is the smallest amount of money you can pay to keep your credit card in good standing. You’re contractually obligated to pay this minimum, so failing to do so may result in a late fee. In some cases, your card issuer may raise your interest rate. This is also known as a penalty APR.

How credit card minimum payments are calculated

The minimum payment you owe will be either a fixed amount — often $10 — or a percentage of the balance, whichever is greater. Some cards require you to pay a flat percentage of your credit card balance — typically between 1% to 3%. Others may require a percentage, plus any late fees and accrued interest.

You can learn more about how your card issuer calculates minimum payments in your cardholder agreement, which is part of the paperwork you get when you first receive your card. You may also find the agreement online when you log into your account. If you’re having trouble locating your agreement, call your card provider to request a paper or digital copy.

Credit card minimum payment examples

What happens if I only make the minimum payment?

Let’s say you owe $5,000 on a credit card with a 20% interest rate. The minimum payment is a flat 3% of your overall balance. The card’s interest is compounded monthly at a rate of 1.6% (20% APR divided by 12 months). Credit card interest is typically calculated on a daily basis, but this example uses monthly compounded interest to keep things a bit simpler.

Here’s how two potential payment schedules would shake out over the course of four months.

Credit card interest accrual with minimum payments

Over the course of four months, you’d have paid a total of $587.07 by consistently making the minimum payment. But due to interest charges, you’d have only reduced the overall balance of your credit card by $283.37. Your money was only about half as effective as it could have been, with 49% of what you paid actually being applied to the principal balance.

Let’s see what happens when you pay more than the minimum.

Credit card interest accrual with larger payments

In this second example, you’d have paid a total of $778.03 by making the minimum payment plus an additional $50 monthly. After interest charges, you’d have reduced the overall balance of your credit card by $482.21. By paying more than the minimum, your money would have been far more effective, with 62% of what you paid actually being applied to the principal balance.

The bottom line: Paying more than the minimum balance means your money is more effective, you generate less interest and you’ll pay off your credit card at a faster rate.

3 drawbacks to paying the minimum on your credit card

Sometimes you can only make the minimum payment, and that’s okay — so long as it doesn’t become a habit. If you find yourself consistently opting for the minimum, you’ll face these significant drawbacks.

1. It will take longer to pay off debt

Credit card issuers tend to set minimum payment requirements at rock-bottom levels. Making these small payments on time will let you avoid late fees, but you won’t make any real progress on paying down your balance.

How this affects you: Look at your credit card bill. Federal regulations require that it must include how long it would take you to pay off your balance if you pay only the minimum each month. You’ll significantly shorten that period just by paying more than the minimum, even if you can’t pay the full balance.

In the first example above — the one in which only the minimum amount is paid — it would take 20 years and 11 months to completely pay off the balance of the credit card. If an additional $50 was paid monthly, as depicted in the second example, it would take just five years and three months — one-quarter of the time.

2. You’ll end up paying a lot more interest

Even if you’re using a card with a lower-than-typical interest rate, your interest charges will grow — quickly — along with your balance. Make only the minimum payment, and you’ll barely wipe out last month’s interest. And if you keep charging items to the card, you’ll fall further and further behind.

How this affects you: To estimate your interest charges, divide your card’s annual interest rate (AIR) by 12 and multiply it by your average balance. If your card has a 21% AIR, for example, your monthly interest rate would be 1.75%, or 21% divided by 12. Multiply that by the balance you’re carrying. If you have a balance of $10,000 and you paid only the minimum, you’d owe about $175 in interest next month.

Paying more of your balance each month means you can start next month with less debt.

Returning to the two examples above: Making only the minimum payment, you would generate $5,990.60 in interest as you paid off your credit card. If you paid an additional $50 monthly, you would generate $2,304.13 in interest — less than half the amount of interest accrued in the first example.

3. Your credit scores could suffer

When your credit card balance climbs, so does your credit utilization ratio — the percentage of your credit you’re using. And because your credit utilization ratio is a major factor in your credit score (30% of it) high balances can badly damage your credit score. That makes it harder to qualify for affordable loans and credit cards with the best terms. It can even affect your ability to find a job or rent an apartment, as employers and landlords commonly review applicants’ credit.

It’s best to use less than 35% of your credit limit on any given card. If you can use less, that’s even better.

How this affects you: Use a credit utilization calculator to determine your ratio. If your debt is bumping up against your credit limit, focus on bringing down your balances as much as you can.

If you feel squeezed for cash at the end of the month, try paying your credit card bill right after payday. Or if you’re able, volunteer for more shifts at work and put the extra cash toward your debt.

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3 tips to pay down your credit card bill faster

If you’re eager to pay off your credit card, and have the financial flexibility to explore other options, these three payment tips may help.

1. Go beyond minimum payments. Paying more than the minimum can significantly reduce your payment timeline — and the amount of interest you rack up. Whatever you can contribute beyond the minimum, even if it’s just an extra $5 monthly, will have a noticable impact.
2. Make smaller payments more often. Credit card interest is based on the average daily balance of your card. Splitting your monthly payment into two bi-weekly payments will reduce your average daily balance and cut down on excess interest charges.
3. Switch to a balance transfer card. Balance transfer cards offer 0% introductory interest rates for a set period of time — typically 12 to 18 months. You won’t accrue any interest during this period which means every payment you make will go directly towards the principal balance.