Minimum payment on a credit card

Summary

• The minimum payment on a credit card is the amount you must pay to keep your account in good standing and avoid penalty fees.
• Only paying the minimum payment, however, could lead to bigger interest charges as your account balance increases.
• If possible, you may want to pay your statement balance off each month to avoid costly interest charges.

When you make a credit card payment, you have the option to pay the account balance, the statement balance, or a minimum payment. You might think paying the minimum amount every month is a good way to save money. That’s typically not the case. Only making minimum credit card payments may actually end up costing you more in the long run. Here, we explain how the minimum payment on a credit card works, and why you shouldn’t stick to only paying that amount.

What’s the minimum payment on a credit card?

The minimum payment on a credit card is the smallest amount you must pay in a bill cycle to keep your account in good standing. Paying the minimum amount has a few key benefits:

• Avoids late fees
• Avoids penalty interest rates
• Prevents negative impacts on your credit score.

However, you’re still charged interest on your remaining account balance, unless you have a low intro annual percentage rate (APR). Those interest charges could add up, especially if you get into a habit of only paying the minimum due.

How is your minimum payment calculated?

Your minimum payment is typically calculated by a percentage of your account balance. Credit card providers may charge a flat rate if it’s a greater number than the percentage of your account balance, as well as any additional charges.1 The final calculation usually consists of.

• Base amount: The initial base is usually either a flat percentage of your total account balance or a percentage plus the cost of interest and fees. If your balance is under a specific threshold, the card provider may make your minimum payment a flat amount. If your balance is below that amount, you may be asked to pay your full balance.
• Past-due, over-limit, and installment plan amounts: If you have any past-due balance, over-limit amounts, or installment plan payments, some credit card providers may add the base minimum payment to that amount. Others may add these amounts, plus fees, after the base minimum payment has been calculated.
• Rounding: Most credit card providers round minimum payments up to the nearest dollar.

For example, let’s say you have an account balance of $500 and a $50 past-due balance. Your card provider’s minimum payment is the greater of 3% or $30. Since 3% of $500 is just $15, the provider charges the base amount ($30) plus the past-due balance. So, your minimum payment due is $30 + $50 = $80.

When should you pay your minimum payment?

Paying the minimum payment due on or before your payment due date is best for keeping your account in good standing. It may be a good idea to set up automatic payments, if available, to ensure you never forget a payment.

Can you pay more than the minimum payment on your credit card?

You can pay more than the minimum payment on your credit card. In fact, doing so is usually a good idea. If you only pay the minimum, your statement balance begins accruing interest. Each bill cycle, your statement balance is likely to increase, which also increases the amount of interest you owe.

Remember, your minimum payment due increases with the total amount owed. As you continue to use your card and accrue interest charges, paying only the minimum doesn’t save you money in the long term.

Know how to manage your credit

Making the minimum payment on your credit card each month helps you avoid penalty fees or negative impacts on your credit score. However, it may also increase the amount of interest you owe on your account balance. If you can afford to pay off your statement balance each month, you should do so to avoid additional interest charges.

Save money with a lower APR

You may avoid interest charges by paying your credit card statement balance in full every month, but sometimes that’s not possible. By building a strong credit score, you could secure a good credit card APR that’s below the national average. A lower APR could save you significant money if you carry a balance, make a balance transfer, or use your credit card for a major purchase.