Credit Card Minimum Payments: Everything You Need To Know

What is a Credit Card Minimum Payment?

A credit card minimum payment refers to the minimum amount you must pay on your outstanding credit card balance each month.

You can find this figure on your credit card statement or through your online banking.

Complying with the minimum payment requirement will keep you in good standing with your card issuer.

You’ll avoid excessive interest rate charges and pesky late fees, as well as keep your credit score in top shape.

The minimum payment is one of the most vital aspects of credit cards.

It directly or indirectly impacts almost every facet of your finances, especially if you rely on debt routinely, so exploring how it works is worthwhile.

What Happens if You Only Pay the Minimum on Credit Cards?

Contributing only the minimum payment on your card’s balance each month is acceptable, however not a financially savvy idea.

You won’t incur any fees or penalties by only paying the minimum amount.

However, you can easily fall into the habit of paying strictly the minimum amount that appears on your monthly statement.

This routine can, over time, adversely affect your finances.

Contributing the minimum will lengthen the time it takes for you to pay your balance in full and riddle your account with interest charges.

If you don’t pay off your card’s balance in its entirety by the due date, the balance will carry over into the next billing period.

As a result, you’ll lose your grace period, and interest will accumulate on the unpaid balance, as well as any new purchases you charge to your card.

And with the average credit card interest rate being 19.99%, your balance will grow exponentially.

Given enough time, your credit card debt can quickly drain your budget and overwhelm you financially.

If you’re content with simply paying the minimum payment, it could be years before you finally settle your outstanding balance.

An example will help to illustrate this point.

Suppose that you carry a balance on your credit card of $2,000, which you amassed during a single billing cycle.

Your annual percentage rate (APR) is 19.99%, so using a simple interest calculation, you owe $33.32 in interest.

Your credit card statement would look something like this:

Starting outstanding balance $2,000.00
Interest charged for billing cycle $33.32
   
Total outstanding balance $2,033.32
Minimum Payment Made $43.32
New outstanding balance $1,990

As you can see, paying only the minimum amount mostly covers your interest charges, so it will take a long time to pay the entire amount off.

Minimum payments keep your credit utilization ratio high for a prolonged period since you pay down your balance at a slow rate.

An excessively high ratio signals that you’re carrying a high debt load to credit bureaus, putting you at greater risk of defaulting.

As a result, they’ll downgrade your credit score.

Making online payment to credit card

How is the Minimum Payment on a Credit Card Calculated?

Card issuers typically calculate the minimum payment on a credit card using one of two methods:

  • As a flat rate
  • As a percentage of the total outstanding balance or a minimum fixed amount, whichever is higher.

With a flat rate, you’ll pay a small, fixed amount of the principal, plus any applicable interest and fees.

For example, suppose your outstanding balance at the end of the billing period is $2,000.

In that case, your statement will indicate you must pay a minimum of $10 plus the interest charges and fees.

Card issuers generally employ the percentage of balance method for larger balances—most charge 2% – 3% on your outstanding balance each billing period.

For example, let’s assume you have a balance of $2,000, and your minimum payment is the greater of $20 of 2.5% of your balance owing.

In that case, you’d be obliged to pay $50 since it’s the larger of the two numbers.

Late or Missing Credit Card Minimum Payments

Here are some of the negative consequences of failing to make timely minimum payments:

1. Penalty APR

Some card issuers can hike your interest rate if you miss too many payment deadlines over a short time span.

They’ll replace your regular APR with a penalty APR, which could be as high as 30%.

2. Credit score downgrade

On-time payments are crucial for maintaining a healthy credit profile (your payment history constitutes 35% of your overall credit score).

Should you fail to pay the minimum required more than 30 days past your statement’s due date, your credit score will take a hit.

3. Loss of promotional offers and perks

Your card issuer might cut off your access to promotional offers or rewards associated with your card.

For example, they can withdraw a zero-percent introductory rate and apply their standard rate instead.

4. Cancellation of your credit card

Should your missed payments persist for a lengthy period, your card issuer could elect to cancel your account to protect themselves from the risk of you defaulting.

What To Do If You Can’t Make Your Minimum Payment

If you anticipate missing your upcoming minimum payment, you should notify your card issuer immediately and work with them to implement a solution.

Explain your predicament calmly and diplomatically and try to negotiate a payment deferral.

You’ll gain extra time to acquire the necessary funds and avoid fees and penalties by postponing your payment.

If possible, pay a reduced amount of your minimum – this will indicate to your issuer that you’re making a concerted effort to honour your end of the bargain.

Remember that interest will still accrue on your unpaid balance during the deferral period.

Key Insight

To ease the financial hardship Canadians face because of the COVID-19 pandemic, some of Canada’s top banks set up temporary credit card payment deferrals .

Frequently Asked Questions

  • Is there a minimum payment on a 0% credit card?
  • Will I be charged interest if I pay the minimum payment?

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.