Minimum Payment

Minimum payment summary:

• A minimum payment typically covers a tiny fraction of your loan balance.

• Long term, it’s cheaper to pay off your full credit card balance each month.

• Debt settlement is worth considering when you genuinely can’t afford to fully repay your debts.

Minimum Payment Definition and Meaning

The minimum payment on a credit card is the bare minimum you must pay each month to keep your account in good standing and avoid late fees. Lenders calculate the minimum payment as approximately 2-4% of your total debt, with a flat minimum (such as $35) for small balances.

Covering the minimum payment differs from paying the full balance. On most credit cards, you can avoid paying interest if you pay the full balance. You’ll keep your account in good standing if you at least pay the minimum, but you’ll stay in debt longer and probably pay interest charges.

Example Minimum Payment Scenario

Here’s what it looks like to make only a minimum payment. Say you have to cover a $1,000 expense with a credit card. You have a choice: Pay off the whole $1,000 or go with the minimum payment.

If your credit card offers an interest-free grace period (most do), paying off the full $1,000 by the payment due date is like hitting the reset button. You dodge any interest charges. No debt hanging over your head.

On the flip side, if you just pay the minimum, say $25, you’re still on the hook for $975. Interest kicks in. At 24.99%, the interest in the first month alone is more than $20, and your next payment mostly feeds that instead of cutting down the debt. It’s a slower, pricier way to climb out. If you stick with that $25 payment, it’ll take you more than eight years to pay off the debt. You’ll pay off the $1,000 that you borrowed, plus almost $1,200 in interest charges. 

Minimum Payment: A Comprehensive Breakdown

The minimum payment is the bare minimum for paying debt without getting into trouble with your creditors. By making the minimum payment, you prioritize flexibility and short-term cash over total money spent. 

Making a minimum payment may be necessary when you're waiting for a checking account deposit, or you need the money to pay down a higher-priority debt.

Minimum payments could affect credit scores, indirectly, if it keeps your credit utilization high. That’s your credit card balance compared to your credit limit. High credit card balances are likely to lower your credit score and make you look riskier to lenders. 

When you can’t afford to make a minimum payment

Sometimes life throws financial curve balls at us. If you’re juggling multiple debt payments and you’ve hit the point where it’s hard to keep up, it’s a tricky spot to be in.

One solution is to negotiate with creditors yourself. If you can convince your creditor that although you intended to fully repay your debts, you genuinely can’t, they might be willing to lower the amount that you owe. It’s a straightforward option with little downside.

Professional debt settlement is when you let expert negotiators work out agreements with your creditors on your behalf. A professional might be able to get better results than you could get for yourself. Settling debts could help you clear them for less money and in less time than slogging along with minimum payments.

Read more: How to Get Out of Credit Card Debt