What Is a Minimum Payment on a Credit Card?

A minimum payment on a credit card is the smallest amount a cardholder must pay by the due date to keep their account in good standing and avoid penalties. This required sum typically constitutes a small fraction of the overall balance owed.

Understanding the Minimum Payment

The minimum payment is the lowest sum a cardholder can pay by the statement’s due date to prevent the account from being delinquent and incurring additional charges. Credit card issuers determine this amount through various calculations. It commonly includes a percentage of the outstanding balance, often ranging from 1% to 4%, or a fixed dollar amount, such as $25 or $35, whichever is greater.

Beyond a percentage of the principal balance, the minimum payment also incorporates any accrued interest from the previous billing cycle. Any previously unpaid late fees or over-limit fees from prior periods are added to this amount. The specific minimum payment can fluctuate each month, influenced by the current outstanding balance, the applicable interest rate, and any accumulated fees. Cardholders can find the precise minimum payment amount on their monthly credit card statement.

The Implications of Paying Only the Minimum

Paying only the minimum amount on a credit card has financial implications that extend the life and cost of the debt. A portion of a minimum payment often covers accrued interest and fees rather than reducing the principal balance. This means very little of the payment directly diminishes the original amount borrowed.

This repayment approach leads to an extended repayment period for the debt. For example, a balance that might be paid off in a few months with larger payments could take years or decades to resolve when only minimum payments are consistently made. The prolonged period results in continuous interest accrual. The total amount repaid for original purchases can be higher than their initial cost, sometimes doubling or tripling the original price.

Maintaining a high outstanding balance due to minimum payments can negatively affect a cardholder’s credit utilization ratio. This ratio, which compares the amount of credit used to the total available credit, is a factor in credit scoring models. Keeping this ratio elevated can exert downward pressure on credit scores. Consistently paying only the minimum can create a cycle of debt, where the balance appears to shrink slowly, making it challenging to achieve financial freedom.

What Happens When a Minimum Payment is Missed

Failing to make the minimum payment by the due date triggers consequences from the credit card issuer. One penalty is the assessment of a late fee. A new rule from the Consumer Financial Protection Bureau (CFPB) effective May 2024 caps these fees at $8 for larger credit card issuers. Smaller banks and credit unions may still charge higher fees, ranging from $21 to $40.

Beyond a late fee, missing a payment can trigger a penalty Annual Percentage Rate (APR) on the account. This higher interest rate, which can be as high as 29.99%, is applied if a payment is 60 days past due. The penalty APR can apply to new purchases and, in some cases, to the existing balance, increasing the cost of carrying debt.

Missed payments are reported to the major credit bureaus, which can damage a cardholder’s credit score. Payment history is a primary factor in credit scoring, and a negative mark remains on a credit report for several years. Repeated missed payments can lead to the credit card account being declared in default by the issuer, or closed entirely, limiting access to credit and impacting future financial opportunities.