What Happens If You Only Pay the Minimum on Your Credit Card?

What Happens If You Only Pay the Minimum on Your Credit Card? article image.

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Paying only the minimum amount due on your credit card bill could impact your credit scores and cause you to pay a lot in interest. On the other hand, paying more than the minimum helps you save money, pay off your credit card balances faster and possibly improve your credit scores.

How Do Credit Card Minimum Payments Work?

A minimum payment is the smallest amount your credit card issuer will accept toward your credit card balance each month. You must pay at least this amount for your payment to be considered "on time," and to avoid late fees and other penalties. Some creditors may even increase your interest rate if you make a late payment.

The amount of your minimum payment is typically calculated as a percentage of the outstanding balance or a set dollar amount (like $25). It usually comes out to between 1% and 3% of the outstanding balance on your credit card, and includes accrued interest and applicable fees. Generally, if your total balance is less than the minimum due, your balance must be paid in full.

It's important to understand your credit card issuer's minimum payment policies, as they vary from company to company. Here's how minimum payments generally work for some of the more popular cards from the biggest credit card companies:

  • Bank of America® Customized Cash Rewards credit card: $35, or 1% of your balance plus new interest and late fees (if applicable), whichever is greater.
  • Capital One Platinum Credit Card: $25, or 1% of your balance plus new interest and late fees (if applicable), whichever is greater.
  • Chase Freedom Unlimited®: $35, or 1% of the balance plus interest and late fees (if applicable), whichever is greater.
  • Citi® Double Cash Card - 18 month BT offer: $35, or 1% of the new balance plus interest and late fees, or 1.5% of the new balance, whichever is greater. Plus any past-due balance, overlimit balance or Citi Flex Plan payments.
  • First Progress Platinum Elite Mastercard® Secured Credit Card: $40 or 5% of the balance plus interest, past-due amounts and any balance that exceeds your credit limit, whichever is greater.
  • Wells Fargo Platinum Visa®: $25, or 1% of the statement balance, the annual fee (if applicable) and interest plus any past-due amount, whichever is greater.
  • American Express: Minimum payments can vary widely based on whether your card is a traditional credit card (such as the American Express Cash Magnet® Card) or not (the American Express® Gold Card, for example). Some American Express cards will require more to be paid toward a balance every month, allowing you to carry a balance for certain charges, but not all, with the option to pay off purchases over time in monthly installments.

Please note that these minimum payment policies are current as of September 2020. Read over your cardholder agreement to see complete minimum payment details for your credit card.

Only Making Minimum Payments Means You Pay More in Interest

You may have more money in your pocket each month if you only make the minimum payment, but you'll end up paying far than your original balance by the time you pay it off. Plus, only paying the minimum means you'll be in debt for much longer. Why? Only a small percentage of a minimum payment is applied to the card's principal balance—the remainder takes care of the accrued interest and fees. So, if your credit card has a 21% interest rate and $4,000 balance, paying the minimum of 1% plus interest each month will keep you in debt for 257 months. Plus, you will spend $6,374.64 in interest, bringing the total cost you'll pay to more than $10,000.

If you have a card that offers a promotional 0% APR period on purchases, you don't necessarily have to pay more than the minimum right away to avoid racking up interest charges. These cards allow you to make purchases without accruing interest for a set period if you make the minimum monthly payments on time. If at all possible, have the balance paid in full before the promotional interest-free period ends or else the credit card issuer will begin to charge interest on any balance that remains.

How Only Making Minimum Payments Can Affect Your Credit

Credit scoring models consider your credit utilization ratio, or the percentage of available credit you're using, when calculating your score. Ideally, you want your utilization to be at or below 30% to avoid hurting your credit score, but the lower, the better.

To illustrate, if your credit limit on all your cards is $10,000 and you carry a balance of $6,000, your utilization ratio is 60%. If you only make the minimum payment, you'll maintain this high balance for much longer even if you stop using the card to make purchases. So, to minimize harm to your credit scores, try to increase your monthly payment in order to get your credit utilization ratio to 30% or lower.

What to Do if You Can't Pay Off Your Balance in Full Every Month

It's important to at least pay the minimum each month to avoid late fees, penalty APRs and to preserve your credit rating. If possible, you want to pay the balance in full every month to keep your utilization low and save a bundle on interest and possibly help lift your credit score. But what if you're strapped for cash and can't pay the entire balance in full?

Pay as much as you can comfortably afford to get the balance down. This allows you to get out of debt faster and free up funds to meet other financial goals. Struggling to come up with money to pay more than the minimum on your credit cards each month? Creating a budget can help you get a handle on your spending. Cut or reduce your expenses and put the extra cash towards your credit cards. You might also try finding other ways to earn extra income, like getting a part-time job or exploring freelance opportunities.

Choosing a credit card repayment strategy will also help you prioritize which credit cards to aggressively pay down first. For example, the avalanche method of paying down your cards has you focus on the accounts with the highest interest rates. You can also follow the snowball method, which calls for you to target the card with the lowest balance first.

If funds are tight and you are having trouble keeping up with the minimum payments, call your credit card issuer to discuss your situation. They may offer you a payment arrangement if you're going through a rough financial patch. Some also have hardship programs that are available to financially distressed card holders.

Credit counseling is another option for those having trouble making payments. This service is usually provided for free by nonprofit organizations that teach consumers sound money management habits. They can also help you create a debt management plan to pay down your balances. Under this arrangement, you will make one payment to the credit counseling agency each month and they will distribute funds to the creditors after negotiating more favorable account terms on your behalf, like lower interest rates, waived fees or payment extensions.

The Bottom Line

If you can do so, paying more than the minimum payment on your credit card can save you a lot in interest and help protect your credit rating. Better yet, paying your balance in full will help you avoid paying any interest at all and keep your utilization ratio low.

Worried that your credit score may be impacted because you can't keep up with the minimum payments? Reach out to the credit card issuer promptly to inquire about relief options that may be available to you. Also, keep tabs on your credit score and overall credit health with free credit monitoring from Experian.

All information about the Bank of America® Customized Cash Rewards credit card and the American Express Cash Magnet® Card has been collected independently by Experian and has not been reviewed or provided by the issuer of the card. The American Express Cash Magnet® Card is no longer available through Experian.

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