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Minimum Credit Card Payments: How They Work and Why They Should Only Be a Last Resort

By
Samantha Rose
Samantha Rose covers financial literacy for the educational arm of OppLoans. Her work focuses on providing hands-on resources for high school and college-age students in addition to their parents and educators.
Updated on March 18, 2021
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Tempting. But are they a good idea?

Your monthly credit card bill arrives. You see the total amount due, and then you see a different number — a much lower number. 

Most credit card companies give customers the option to make a minimum payment. It’s tempting because it’s usually far less than the full amount owed, but what happens if you go for it?

Long story short: debt.

Here’s the deal on minimum credit card payments — and why you should always pay the full amount if you can.

What happens if I only make the minimum payment on my credit card?

Making the minimum payment means you are paying the bare minimum. It keeps your credit card account in good standing. It also helps avoid late fees. But that’s about it. Paying the minimum amount due still racks up interest on the remaining balance and extends the life of your debt by months, possibly even years.

Look at your credit card statement. Credit issuers often include a table labeled “Minimum Payment Warning.” This chart estimates that amount of time it will take to pay off your credit card balance if you only pay the minimum. What does yours say? Five years or 30 years? Reduce this timeframe by paying more than the minimum.

Credit card issuers charge interest on unpaid debts. So unless you have a 0% APR card, you are paying the interest rate set by your issuer, which can range from 13% to 25%. Paying the minimum will barely scratch the surface of your principal, which is the amount owed before interest and fees.

High credit card balances mean a high credit utilization ratio. And this directly impacts your credit score. The ideal credit utilization rate is under 30%. Aim to use no more than 30% of your total credit limit across your credit cards. A bad credit score will make it harder to qualify for financial products, like credit cards, loans, or mortgages. 

How much is my minimum payment?

A lender calculates the minimum payment based on the total credit card balance. It is either a percentage of the total or a fixed amount, depending on your balance threshold. For instance, carrying a high balance, over $1,000, will likely have a minimum calculated on interest. A low balance of $100 will instead have a fixed minimum. Financial institutions vary, but expect a percentage between 1% and 4% and a fixed amount of about $25.

Other factors can affect your minimum payment amount — missing a payment, for example. If you miss a payment, expect your next bill to increase to cover any past-due amounts.

To find out your minimum payment, look at your credit card billing statement. The amount will change from month to month, so it’s important to monitor your account for updates. 

Can I request a lower minimum payment?

No. Most financial institutions won’t adjust the minimum payment amount, because it is carefully calculated. But you do have other options.

No. 1: Reduce the interest rate

Call your credit card issuer to ask for an interest-rate reduction. Some institutions might honor this request for a longtime customer in good financial standing. A lower interest rate will save you money over the life of the debt.

No. 2: Reallocate extra money

To reduce your payments, the best method is to pay off as much of your credit card debt as possible upfront. This money will go directly toward the principal amount, reducing the interest owed, and subsequently the minimum payment. Find extra money in your budget by cutting or reducing unnecessary purchases. 

No. 3: Consolidate debt

If you have multiple credit card payments, consider consolidating these debts. Consolidation will create one lump payment each month, which might reduce your minimum payment. One option is to take out a personal loan to cover all your debt and then pay off that single loan. Consult a financial professional to explore your options.

No. 4: Transfer balance

Have you considered transferring the balance of your high-interest credit card? Sign up for a credit card with a lower or 0% introductory APR. Then transfer the balance of your old card to the new card. You might have to pay a one-time balance transfer fee — either a percentage of the total or a fixed fee. This is a convenient way to lower your payment, with more of your money going directly to the principal balance. Just make sure to pay off the card before the introductory period ends, which can range from one month to one year.

No. 5: Financial hardship plan

If you’re experiencing financial hardship, speak with your credit card issuer. Financial institutions often provide alternative payment plans to customers experiencing financial difficulties. But these types of debt management plans vary from company to company, so do your research. 

When is it a bad idea to make only the minimum payment?

If you’re in a good financial position, it’s a bad idea to make only the minimum payment. Pay the full amount due, and by dealing with your debt now, you’ll save money on interest in the long-run. 

When is it a good idea to make only the minimum payment?

If you’re in a tough financial situation, focus on making the minimum payment. Paying the minimum is better than skipping a payment because you’ll avoid racking up late fees and damaging your credit score.

But it’s not a sustainable plan. Making only the minimum payment has two negatives: extending debt for years and costing a lot in interest charges. If your debts feel overwhelming, reach out to a financial professional who can help you explore debt relief options and find a solution. 

Bottom line

The minimum payment is appealing, but it won’t save you money in the long run. If you can pay more, do it.

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