Credit Card Minimum Payments & How To Avoid the Debt Trap

A credit card minimum payment is the lowest amount you can pay on your credit card account each month to avoid late payment fees and penalties. It’s what you must pay to skate by and avoid immediate disaster, but not a good long-term credit card payment strategy. When you only make the minimum payment on your credit card account, you mostly cover interest and fees, so you’re not making much headway on your credit card balance.

Let’s look at credit card minimum payments and how making only minimum payments can keep you in a debt trap. We’ll also show you how to escape the minimum credit card payment trap.

How Credit Card Minimum Payments Work

Credit card minimum payments require cardholders to make a payment each month to avoid late payment fees and penalties and keep the account in good standing. It’s specified on your statement as the amount you must pay by the due date. 

The minimum payment is typically calculated as 1% to 3% of the card’s outstanding balance or a flat fee, whichever is higher. For example, if you owe $1,000 on your credit card and the minimum payment is 2% of the balance, your minimum payment would be $20. If the flat fee for your credit card is $25, your minimum payment would be $25.

Some credit card issuers calculate minimum payments based on a percentage of your balance plus interest or fees from the previous statement period. The percentage or flat fee used to calculate the minimum payment can vary depending on the credit card issuer and agreement terms.

If you only make the minimum payment on your credit card, the remaining balance will accrue interest charges based on the card’s annual percentage rate (APR). This means that if you only make the minimum payment, paying off your credit card debt will take you much longer and cost you significantly more in interest charges. 

Bottom Line:

Your credit card’s minimum payment mostly covers interest and fees, so you won’t get far by paying down your balance with a minimum payment.

Where To Find Your Credit Card’s Minimum Payment

You can find your credit card’s minimum payment on your statement or online account access. Or you can call and ask over the phone if you prefer.

Credit card issuers are required by law to disclose how they calculate minimum payments on your credit card statement. Additionally, credit card issuers are required to provide an estimate of how long it will take you to pay off your credit card balance if you only make the minimum payment each month, as well as how much interest you will pay over that time. 

This estimate is the “minimum payment warning.” You can find this information on your monthly credit card statement.

Understanding how your minimum payment is calculated, how long you’ll take to pay off your balance making only the minimum payment, and how much interest you’ll pay over time can help you understand the true cost of making only the minimum payment. It may encourage you to pay more than the minimum to pay off your credit card debt faster and save on interest charges, so read your statement to get the full picture.

Making the Minimum Payment on a Credit Card

Don’t be fooled into thinking that making a minimum payment is good. While avoiding jeopardizing your credit card account isn’t bad, you just keep your head above water when you only make a minimum credit card payment. 

You won’t pay a late fee when you make a minimum payment, which is good. But you’ll pay interest when you carry a balance on your credit card. You’ll lose your interest-free grace period, and charges will start to accumulate interest on your account. Keep carrying that balance month to month, and you’ll pay interest on interest — a recipe for letting debt become unmanageable.

While making the minimum payment on your credit card can help you avoid late payment fees and penalties, it is not a wise long-term financial strategy. Making only the minimum payment will keep you in debt longer and increase the interest you pay over time. If you only make the minimum payment, paying off your credit card debt will take much longer and cost you significantly more interest charges.

For example, if you owe $5,000 on your credit card with an APR of 18% and the minimum payment is 2% of your balance or $25, whichever is greater, your minimum payment would be $100 per month. If you only make minimum payments, it will take you 472 months — 39 years — to pay it off, and you’ll pay more than $13,000 in interest charges. That’s nearly 3 times the original balance just in interest. And that’s assuming you don’t make any new charges on the card.

You should avoid making new charges on any credit card you can’t pay in full each month — especially if you only make the minimum payment. Avoiding new charges can help you keep the balance lower and limit how much interest you have to pay on the account while you pay down the balance.

You should aim to pay off your credit card balance in full each month to avoid interest charges altogether. If that’s impossible, pay as much above the minimum as possible to reduce the interest you’ll pay over time. You can also consider transferring your balance to a credit card with a lower interest rate or taking out a personal loan to pay off your credit card debt.

Hot Tip:

A minimum payment can give you some relief during months when you’re short on income. When you’re temporarily unable to make a full balance payment, you can just make the minimum payment, eat the interest charges, and try to get back to paying it off in full the next month.

How Minimum Credit Card Payments Affect Your Credit

Making only the minimum monthly payments on your credit card can negatively impact your credit score. One factor that affects your credit score is your credit utilization ratio, which is the amount of credit you’ve used compared to your credit limit. If you only make the minimum payments on your credit card, you won’t make much progress paying down balances. Your credit utilization ratio will remain high, which can lower your credit score.

Also, if you fail to make a minimum payment, your payment is considered late. You’ll pay a late fee and may face other penalties. If your payment is more than a month late — a whole billing cycle — it will be reported to the credit bureaus. Once a late payment hits your credit reports, it can negatively affect your credit score and leave a negative mark on your credit history.

How Minimum Payments Apply to Your Balance

If you have more than 1 type of interest on your credit card, such as a promotional rate, a rate for purchases, and a rate for cash advances, your minimum payment will be applied to the charges with the highest interest rate before it applies to charges with lower interest rates.

Additionally, if you carry a monthly balance, your minimum payments will apply first to interest payments, then the balance.

Federal Statutes Regarding Minimum Credit Card Payments

There is no federal statute that sets a specific minimum credit card payment. However, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires credit card issuers to disclose how long it will take to pay off a credit card balance if only the minimum payment is made each month, as well as the total cost of interest charges over that period.

The CARD Act also requires that credit card issuers allocate any amount paid above the minimum payment to the balance with the highest interest rate first. This helps you pay off your balances faster and reduce the total cost of interest charges.

Credit card issuers may set their own minimum payment requirements, and these requirements can vary widely between issuers and credit card products. Carefully review your credit card agreement and monthly statement to understand the minimum payment requirements for your specific credit card.

Avoid the Trap by Paying More Than the Minimum

You can get stuck in a debt trap if you carry a balance, keep making purchases, and accrue interest while only making minimum monthly payments. You can’t make any progress paying down your credit card balances this way and will have to pay interest on interest charges, which makes it even more difficult to get out of the minimum-payment debt trap.

Paying more than the minimum can help you pay off your credit card balance faster and save on interest charges. How much you pay above the minimum will depend on your financial situation and budget. But you should pay as much as possible to quickly reduce your credit card balance and avoid high interest charges.

You should also stop making purchases on the card while paying the balance. It might be tempting, especially as you free up available credit by paying down the balance, but new charges will hinder your progress.

Consider using a debt repayment strategy such as the snowball or avalanche method (detailed below) to help you pay off your credit card debt faster and save money on interest charges.

Debt Snowball Method

The debt snowball method involves paying off the credit card with the smallest balance first while making the minimum payment on all other credit cards. Once you pay off the smallest balance, you take what you were paying on that card and pay off the next smallest balance, and so on, until all balances are paid in full. 

You can build momentum with the snowball method as your debts decrease and you get closure on accounts. That momentum can motivate you to continue paying off your debts.

Debt Avalanche Method

Another popular method is the debt avalanche method, which can offer greater interest savings but doesn’t have the momentum of the snowball method. With the avalanche method, you’ll first pay off the credit card with the highest interest rate while making the minimum payment on all other credit cards. 

Once the credit card with the highest interest rate is paid off, you focus on paying off the next highest interest rate, and so on, until all balances are paid in full. This method can save you more money on interest charges over time but it may take longer to see initial progress in paying off your debts.

If You Can’t Make Your Minimum Payment

Paying your credit card’s full statement balance is best, but making at least a minimum payment can keep you out of hot water. What happens if you can’t make the minimum payment?

Before you miss making a minimum payment, contact the credit card issuer. Talk to them about any hardships or temporary financial situations you’re experiencing and ask about relief options for customers in your position. You may get more time to pay, temporarily reduced interest, or no additional fees to help you get back on track. 

Another more long-term option is opening a balance transfer credit card, which can allow you to pay off your credit card balances at 0% interest. With no interest, you avoid the scenario of 2 steps forward and 1 step back as you basically just cover interest charges with minimum payments.

How To Get Out of the Minimum Credit Card Payment Debt Trap

In summation, follow these steps to get out of the debt trap that results from paying only minimum payments on a credit card:

• Pay more than the minimum payment.
• Make payments on time so you don’t get hit with a late fee added to your balance.
• Contact credit card issuers to negotiate lower credit card interest rates.
• Ask your credit card issuer for help with a hardship program that may temporarily reduce your interest rate or offer other features to help you pay down credit card balances.
• Sign up for a balance transfer credit card so you can transfer your balance and pay it down at 0% during the promotional period.

Final Thoughts

Covering your credit card’s minimum payment will keep your head above water, avoiding late fees and other penalties for missing a payment.

But, it’s not a great long-term plan, as you won’t make much headway on your credit card balance, and it will take much longer to pay it off than it would if you paid more than the minimum payment.

It’s ideal to pay your full balance each statement period, but the next best thing is to pay as much as possible. Failing that, a minimum credit card payment works, but you should make a plan to pay more than that regularly.