In the age of cash-less stores and online-only shops, having a credit card is more essential than ever. That said, the ease and accessibility of using credit (including through your smart watch which makes it easier than ever to pay with your credit card) can easily lead to stifling credit card debt. While credit card companies only ask for a small amount of your total debt each month as a minimum payment, paying only the minimum required amount can be a trap, ensuring you remain in debt for longer.
Credit Card Minimum Payments Explained
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Understanding how your monthly minimum credit card payments work is the key to maintaining a good credit score and will set you up for the future. Alternately, missing a few monthly payments or strictly paying the minimum amount due each month will result in you paying much more money over time for your same initial purchases and can drastically lower your credit score, affecting your ability to buy a car or a home in the future.
A credit card minimum payment is the amount established by your bank or credit provider as the bare minimum amount you will have to pay to avoid late fees or additional charges. Generally, the minimum amount billed is a percentage of the amount of you owe, ranging from 1-3% depending on your bank and the type of card you have. If you’ve missed one or more monthly deadlines, the bank will also add on late fees and interest on the amount owed.
In order to avoid paying extra fees, you must make the minimum payment before the due date. This is the date specified in your monthly statement.
What is a credit card minimum payment?
A credit card minimum payment is the amount established by your bank or credit provider as the bare minimum amount you will have to pay to avoid late fees or additional charges. Generally, the minimum amount billed is a percentage of the amount of you owe, ranging from 1-3% depending on your bank and the type of card you have. If you’ve missed one or more monthly deadlines, the bank will also add on late fees and interest on the amount owed.
In order to avoid paying extra fees, you must make the minimum payment before the due date. This is the date specified in your monthly statement.
How is the credit card minimum payment calculated?
Your monthly credit card minimum payment is calculated as a percentage of the total amount you have charged to the card, which is usually between 1-3% depending on the type of card you have. Most cards also have a flat monthly fee system; if the percentage of what you owe is lower than the amount of the monthly flat fee, the flat fee applies. Monthly credit card minimum flat fees vary between $10 – $25.
What if you only make the minimum payment on your credit card?
Paying the minimum required monthly payment on your credit card should only be reserved for emergencies. If you are very tight on funds for one month (around the holidays, for example), paying the minimum amount on your credit card isn’t the end of the world.
But if you keep up a practice of only paying the minimum each month, you are going to be paying off your balance for much longer. If you keep that practice up for months and even years, the interest will continue to rise. Can you imagine how much longer that will take to pay off?
In addition to making it extremely difficult to pay down your card, sticking to the minimum monthly payment can also negatively affect your credit utilization score. Your credit utilization is measured by how much debt you have vs. your credit limit. As the money you owe on your credit card goes up, it raises your credit utilization ratio. That in turn affects your overall credit score.
It is generally advised to have a maximum credit utilization of 30%. So, if you have a $1,000 credit limit on your card, the maximum amount you should owe would be $300. By only paying down the minimum required payment, you are keeping your credit utilization high, creating a domino effect that will make it more difficult to secure a low rate when you are ready to buy a house or open up a line of credit.
Below is a handy breakdown via the Canadian credit card minimum payment calculator that illustrates the difference in paying the minimum monthly payment each month, as opposed to paying a slightly higher rate each month or a more substantial flat rate.
If you’re carrying a $2,000 balance on your credit card with a 19.99% annual interest rate, here is how much time and money you can save by paying even slightly more than the minimum $60 payment each month:
| Monthly Minimum ($60) | Monthly Minimum + $5 | $100 a month | |
|---|---|---|---|
| Balance | $2000 | $2000 | $2000 |
| Time to pay off | 15 years, 3 months | 9 years, 11 months | 2 years, 1 month |
| Interest paid | $2,238.13 | $1,604.98 | $452.92 |
| Money Saved | N/A | $633.15 | $1785.21 |
| Time Saved | N/A | 5 years, 4 months | 13 years, 2 months |
As the above table illustrates, paying an extra $5 above the minimum per month saves you over $600 in additional fees over time, and ensures that you will pay down your total balance five years earlier than if you stuck with only paying the minimum balance.
Based on the $60 monthly minimum, a payment of $100 each month would save you almost $1,800 in the long term (almost the entire amount of your initial debt!) while ensuring your balance would be paid in just over two years instead of a whopping 15 years!
How does it affect your credit score?
Paying the bare minimum amount each month makes it very difficult to make any kind of dent in the balance you owe, which negatively impacts your credit utilization, as explained above. A low credit utilization ratio (less than 30% of your credit limit) boosts your overall credit score and vice versa. If you want to maintain a high credit score, try to pay even slightly more than your minimum required monthly credit card payments to keep your credit score in good standing.
When should you make your minimum payment?
Knowing when to pay your minimum credit card payment is vital for building credit. Unlike many other bills you may receive each month, paying your minimum credit card fee even a few days late can seriously affect your credit rating.
To be safe, try to make your minimum credit card payment a few days before the due date specified in your monthly statement. There may be a delay in the online processing system, and you want to be sure your payment is received and credited to your account before the due date.
If you miss the payment date, you will instantly begin paying interest charges on the total amount owed, which can be 20% or more depending on the type of credit card you have. You will also be subject to late fee charges and potentially other administrative charges, which will be tacked onto your balance, creating more debt.
If you are making the same monthly payment each month, you can program your bank account to automatically make the payments each month. This is your safest best, since any of us can forget to pay a bill in time, which isn’t a practice you want to make a habit of with your credit card payments.
How to pay off your credit card debt
Pay your credit card bill on time
As we said earlier, interest charges and late fees begin racking up the day after your monthly due date on your statement. To avoid adding unnecessary fees to your balance, be sure to make your payment on (or ideally before) the due date.
Pay more than the minimum amount each month
If you can afford it, pay more than the minimum amount of your bill each month, even if it’s $5 or $10. That small difference can take years off the total time it will take you to pay off your balance by saving you on interest charges as you chip away at your total. You will also save money in the long run as every extra dollar over the minimum required payment reduces your initial balance.
Watch your spending
We’re not here to shop-shame, but any additional charges you add to your overall credit card debt will make it that much more difficult to pay down your balance. It may be hard to resist a sale or a night out with friends, but keep in mind that every extra charge is adding to your overall debt. If you can, try to use your debit card until your credit card balance is paid off.
Our final thoughts
It may be tempting to only pay the minimum required amount on your credit card bill every month, but that’s a practice guaranteed to make it more difficult (and more expensive) to pay off your debt.
Even an extra $5, $10, or $20 a month can make a huge difference in the amount of time it will take to pay off your balance (you’ll also save money in the long run and improve your credit score at the same time).
Pay attention to your monthly statement due dates, and be consistent in your payments; setting up monthly automatic withdrawals from your bank account is the best way to keep on top of your payments and avoid extra charges.
Having a credit card can make your life easier in a number of ways, but that ease of use can have long-term ramifications if you’re not careful. Keep on top of your payments and pay more than the bare minimum each month and you’ll be setting yourself up for a lifetime of strong credit. Your future self will thank you.
Gabriel Sigler
Frequently asked questions
Your credit card minimum payment will vary based on the balance you owe on the card. The minimum monthly payment is generally 3% of the total amount owed, or a $10 – $25 fee plus interest and possible fees (whichever amount is greater). If you’ve elected for paper or electronic monthly statements from your credit card provider, the minimum payment will be displayed on the top portion of your statement. While the minimum monthly payment is all you need to pay to avoid paying penalties, only paying the minimum amount due each month will drastically prolong the time it will take to clear your debt, as the monthly interest will keep accumulating.
Your monthly credit card minimum payments may increase for a number of reasons. If you’ve been spending more, your balance will be higher and the monthly percentage of the balance owed will then increase. As you keep a balance on your credit card, you are adding on interest charges every month. Over time, this can add up to a substantial amount, which will increase your overall balance and your minimum monthly payment. Your minimum credit card payment may also increase if you’ve incurred late charges, so be sure to pay close attention to your statement due date each month.
In certain circumstances, you can defer your minimum credit card payments, often for a short amount of time. Especially during COVID-19, many providers have made it easier to defer your monthly credit card payments, usually for up to 3 months. However, interest will still accrue during this period, and your minimum payment amount may increase after the deferment period. While deferring your credit card payments may seem like an easy solution, be sure to talk to your credit provider to understand the possible ramifications of your choice.
