What Happens If You Pay Less Than Minimum on Credit Card?
Understand the significant financial and credit implications that arise from paying less than your credit card's minimum requirement.
Paying less than the minimum payment on a credit card can trigger financial setbacks. Understanding these repercussions, which extend beyond immediate fees and affect long-term financial health, helps individuals make informed decisions about managing their credit card accounts.
Understanding Minimum Payments
A credit card minimum payment represents the smallest amount a cardholder must pay by the due date to maintain good standing with the issuer. This payment is typically calculated as a percentage of the outstanding balance, often ranging from 1% to 4%, plus any accrued interest and fees. Some credit card agreements may also set a flat minimum amount, such as $25 or $35, especially for lower balances.
The minimum payment ensures partial repayment each month, helping issuers manage risk and cash flow. While making this payment on time prevents late fees and keeps the account current, it often covers mostly interest and fees, with very little applied to the principal balance. This means that focusing solely on minimum payments can prolong the time it takes to pay off debt and increase the total interest paid over the life of the loan.
Immediate Financial Repercussions
Paying less than the minimum, or not at all, incurs immediate financial penalties, including late fees. Typical credit card late fees range from $25 to $40, though a recent rule change for larger issuers capped most late fees at $8. This fee is immediately added to the outstanding balance, increasing the total amount owed.
Interest charges also accrue, often at an increased rate. Credit card interest is calculated daily on the unpaid balance, including any newly added late fees. This daily compounding means interest is charged not only on the original principal but also on previously accumulated interest, inflating the debt. A significant portion of payments may then cover interest and fees rather than reducing the principal, making it much harder to pay down the debt.
Impact on Your Credit Standing
Paying less than the minimum, or missing it, directly impacts your credit report and score. While a payment a few days late might incur a fee but not be reported, a payment 30 days or more past due is typically reported to major credit bureaus. This negative mark can lower your credit score, with a more severe impact for those with excellent credit.
Credit scores are heavily influenced by payment history (35% of a FICO score) and amounts owed (30%). A missed or underpaid payment negatively affects both. The longer a payment is overdue (e.g., 60 or 90 days), the greater the score damage, potentially leading to drops of 100 points or more. Such derogatory marks can remain on your credit report for up to seven years, affecting your ability to secure future loans, mortgages, or even impact rental applications and insurance rates.
Changes to Your Account Status
Continued underpayment or non-payment can alter your credit card account’s status, including the imposition of a penalty Annual Percentage Rate (APR).
A penalty APR is a higher interest rate applied to your outstanding balance, and sometimes new purchases, for violating card terms like late payments. This rate can be higher than your standard APR, often reaching 29.99%. Federal law requires issuers to provide 45 days’ notice before applying a penalty APR. It may remain in effect for at least six months of consecutive on-time payments before review for a return to the standard rate.
If underpayments or non-payments persist, the account may eventually go into default status. Default typically occurs after 180 days of missed minimum payments, though delinquency often begins after 30 days. The credit card company may then deem the account a loss and close it. Account closure negatively impacts credit utilization, as it reduces your total available credit, making your existing debt appear as a higher percentage of your available credit. The issuer may also begin internal collection activities, such as phone calls and letters, to recover the debt before potentially selling it to a third-party collection agency.