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A minimum payment on a credit card is the lowest amount a cardholder must pay each month to avoid late fees and maintain a good credit standing. This payment keeps the account active and may help prevent default.
The number of credit card users only making their minimum payments reached a twelve-year high in 2024.1
Calculated based on a percentage of the amount owed, the minimum payment on a credit card is the amount that a cardholder must pay monthly to avoid any additional fees. However, there’s a bit more to it than that.
Read on to learn how minimum payments work and why sticking to them is important to financial health.
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The credit card minimum payment amount is the amount a person must pay each month to ensure the account remains open and prevents default due to overdue payments. While the minimum payment has to be paid, cardholders should aim to pay more than that as interest is charged on the remaining balance.
Lenders typically calculate minimum payments as a percentage of the outstanding credit card balance or a flat fee, whichever is higher. For example, a calculation might be 1-2% of the total balance on a credit card or a fixed dollar amount, such as $35.
This payment is the lowest amount required to avoid a late fee. However, it is important to know that a minimum payment may not be enough to cover interest for the entire balance. This means that credit card interest will be applied to the rest of the balance.
Grace periods play a significant role in managing minimum payments. A grace period refers to the time a customer has to pay their credit card debt between the end of a billing cycle and the payment due date. Paying off the entire balance within this period may help avoid interest charges.
Other factors can also impact the minimum payment amount set by the credit card issuer. These factors may include:
It’s important to keep up with minimum payments to prevent these fees from building up. One way to do this is to regularly check credit card statements to stay up to date.
Here is an example of how interest charges can increase when only making credit card minimum payments.
If someone has a $5,000 credit card debt with an APR of 24% and a monthly minimum payment of 2%, their initial payment is $100 in the first month.
Making this payment will see the rest of the balance accrue interest of $73.50, leaving a new balance of $4,973.50. For the second month, the payment would be $99.47, but with $73.12 in added interest after payment.
Continuing this way, most payments go toward interest, extending repayment to over 20 years and resulting in the customer paying more than $8,000 in interest.
This minimum payment calculation is an example of how paying the lowest possible amount on a credit card can add up over time.
The information should be available on the user’s monthly credit card statement. These are received either electronically or by mail. Most issuers provide online statements that cardholders can access by logging into their account.
If a user is unsure of where to find their payment amount, they can contact their issuer directly, either by phone or online. PayPal Credit minimum payments are viewable within the app, online, or in a paper statement, if the user requests it.2
While it’s important to make at least the minimum payment, there may be some drawbacks to continually doing so. Potential impacts of making only the minimum credit card payment include:
Minimum payments usually only cover a portion of the outstanding credit balance. This means that, over time, the total credit card debt will increase due to compounding interest. This occurs because the interest rate applies to the principal balance plus accrued interest. So, interest accrues on interest.
Consistently making only minimum payments on a credit card can lead to a high credit utilization ratio. Lenders calculate this by looking at the percentage of available credit compared to how much customers are using. A high credit utilization ratio can negatively impact one's credit score, making it potentially difficult to obtain loans or favorable interest rates in the future.3
Making only minimum payments can significantly extend a repayment period. This means that it could take longer to pay off the debt, and more interest will be paid over the life of the debt.
People who want to pay off their debt more effectively have many options. There are alternative strategies to managing credit card debt beyond minimum payments. These include:
Responsible credit card use is crucial for maintaining financial health and avoiding debt. Paying more than the minimum balance every month can help cardholders avoid debt and maintain a healthy credit score.
More than that, though, it is essential to spend only what can be repaid on time. Consider using an app, such as the PayPal app, or an expense tracker to help stay on top of bills, monitor transactions, and manage finances.
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