What Happens When You Pay the Minimum on Your Credit Card?

Making the minimum payment on your credit card should be your very last resort. Paying your bill in full, on time, is usually the best way to go. Unless you’re in a 0% APR promo period, anything less results in interest charges.

Yet some people believe they should only pay the minimum on their credit card, while others believe paying the minimum is good for their credit rating – and still others believe it’s bad for their credit rating. Many people don’t know what making a minimum credit card payment actually means for their finances. Whether you’re new to using credit cards or simply want a better understanding of how they work, we’ll provide deeper insight into what happens when you pay the minimum on your credit card.

The minimum payment option on your credit card statement is the lowest amount of money that you are required to pay on your credit card each month to avoid late fees. But paying only the minimum may increase the amount of interest you owe and prolong the time it takes to pay off your balance. Experts recommend that you pay more, up to the full balance, to pay your balance off faster and save money on interest. It’s usually best to consider credit card minimum payments only for financial emergencies.

How the amount of a minimum payment is calculated varies depending on the card issuer, but typically it will be done one of two different ways.

It may be calculated as a flat percentage of your card balance. Or it may be calculated as a flat percentage of your balance plus interest and fees.

For example, if your card issuer charges a flat percentage, then your minimum payment would be a percentage of the total balance. Typically, this is between 2% and 4% of the total balance but will vary depending on your issuer.¹ In this case, interest and fees may be deducted from the total percentage calculated.

If your card issuer uses the alternative method for calculating interest, you’ll typically pay a lower flat percentage but may also need to pay interest and fees for that period.²

Unfortunately, the answer isn’t a simple one - it depends on a variety of factors, such as your interest rate and the amount of your balance. However, in general, making only the minimum payment means you’re paying a small amount of your credit card debt each month, most of which goes towards paying interest rather than the principal. This means it could take several years to pay off your credit card balance. It’s important to keep in mind that paying the minimum payment is only the minimum to keep your account current and in good standing; it won’t get you out of debt quickly.

Your credit card monthly statement should include a table showing how long it would take you to pay off your balance if you paid only the minimum payment.

Despite the potential costs, there still are times when taking advantage of credit card minimum payments can be a good idea. Consider these situations: 

• Cash flow issues: For example, if you lose your job or experience unexpected medical, car, house, etc. expenses.
  
  
• Upcoming large expense: If you expect to need cash for a planned expense, it may take priority over your credit card payment even though it’ll cost you interest charges.
  
  
• 0% APR promotional offer: If your credit card has a 0% introductory APR, then that means that for most purchases no interest is added to your minimum payment during the promotional period, as long as you make the minimum payments on time. But keep in mind that you’ll want to plan to pay off the entire balance before the end of the promotional period before interest kicks in.

During such financial emergencies you may be able to pay the minimum with a clear conscience. But it’s a good idea to do the math to figure out how much this approach will really cost you in interest charges.

According to Experian, making payments on time is the most important factor in credit scores.³ For payments to qualify as “on time,” you have to pay at least the minimum payment by the due date. You don’t get any extra credit score points for paying more than the minimum, and neither is your score penalized if you pay only the minimum.

However, as Experian points out, the second most important factor in your credit score is credit utilization: the portion of your credit limit that your balance uses up. By paying more than your minimum, you might improve your credit score by lowering your balance enough to keep your utilization at or below 30%, which is the level credit bureaus consider good. For example, if you have a $10,000 credit limit, a balance of $3,000 would represent a 30% credit utilization ratio.