Minimum Payment

Detailed Explanation

Minimum payments are a key feature of credit cards, allowing cardholders to maintain their accounts in good standing without paying the full balance owed each month. Typically calculated as a percentage of the total outstanding balance or a fixed minimum dollar amount, whichever is higher, the minimum payment is designed to cover at least the interest and a small portion of the principal.

While making only the minimum payment keeps the account active and avoids late fees, it can lead to a significant increase in the total interest you pay over the life of the debt due to compound interest. You can find the minimum payment amount on each monthly statement, and you must pay it by the due date to avoid late fees and a potential impact on your credit score.

It is always advisable for consumers to pay more than the minimum to decrease their balances faster and reduce the amount of interest accrued.

Example

Bob has a credit card with a balance of $2,000. His card has an annual percentage rate (APR) of 18%, and the card’s terms require a minimum payment of either 2% of the balance or $25, whichever is greater. In Bob’s case, 2% of $2,000 is $40, so his minimum payment for the month is $40.

Key Articles Related To Minimum Payments

• How To Pay Off $10,000 Of Debt In One Year
• Debt Snowball vs. Debt Avalanche: Which Debt Payoff Method Is Best?

Related Terms

Annual Percentage Rate (APR): The yearly rate that is charged for borrowing, which acts as the percentage of the principal and includes any fees or additional costs associated with the transaction.

Credit Score: A numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual.

Interest: The cost of borrowing money, typically expressed as a percentage of the principal, paid by borrowers for the use of the money.

Principal: The original sum of money borrowed on a loan or put into an investment.

FAQs

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

Making only the minimum payment each month will extend the time it takes to pay off your balance and increase the total amount of interest you pay.

Does paying only the minimum payment affect my credit score?

Directly, no; however, consistently making only the minimum payment can keep your credit utilization high, which might negatively impact your credit score.

Can the minimum payment amount change?

Yes, since the minimum payment is often a percentage of the total balance, it can decrease as you pay down your balance or increase if you make additional charges.