Credit Card Basics

Why You Should Make More Than the Minimum Payment on Your Credit Cards

Paying your credit card bills by the due date every month is one of the best ways to improve your credit scores and save on costly late fees. But if you're only making the minimum payment, you could be costing yourself a lot of money—as well as points on your credit scores.

What Is a Credit Card Minimum Payment?

The minimum payment is the least amount of money you must make on your credit card account to avoid incurring any penalty charges. If you don't meet the minimum payment, your card issuer could assess a late fee—and possibly increase your interest rate.

Most credit card issuers determine the minimum payment amount based on a specific dollar amount (like $25) or a percentage of your balance, usually whatever number is greater. That percentage is typically quite low and can range around 1% to 3%. Your minimum payment also usually includes any fees or accrued interest.

Making Only Minimum Payments Will Cost You

If you only make the minimum payments on your credit card each month, you will end up paying a lot more money than you spent on your original purchases—and you'll prolong the amount of time you are in debt. That's because making the minimum payment will not help you make much progress on paying off your balance. And each month, the amount you owe in interest will increase. That means the next month's minimum payment will likely go toward the interest you accrued and not much to the original purchase itself. That's exactly how debt compounds.

The current average interest rate on credit cards is around 18%. So say you spend $5,000 on a credit card in one month, and the minimum payment due is 1% of the balance plus interest. If you only make the minimum payment on your account each month, it will take you 273 months—or almost 23 years—to pay off that debt. In that time, you will have paid a whopping $6,923.09 in interest charges. That's more than double the original amount you charged! And that's if you don't add additional charges to the account.

If you're only making minimum payments, your debt will snowball quickly—and it will take longer and cost more to pay off in full.

Making Only Minimum Payments Will Drag Your Credit Scores Down

A major factor that goes into calculating your credit score is how much credit you're using at any given time, which is known as your credit utilization ratio. If you only make minimum payments on your accounts, the amount of credit you're using in relation to the amount of credit you have available to you remains high.

For example, if you have a $5,000 balance on one of your cards and your overall credit limit is $15,000, your utilization ratio is 30%. But making only the minimum payments will not do much to reduce your utilization. In the case above, making only the minimum payment will chip away at your balance so slowly that your utilization is likely to stay close to 30% for a long time.

Experts suggest keeping your credit utilization below 30%, and for the best scores, below 10%.

What if You Can't Afford to Pay Off a Balance in Full?

Of course, making a minimum payment is better than not paying anything at all—especially because you'll avoid late fees and late marks on your credit report that can drag your scores down even further. But even if you can't pay off a balance in full, paying even just a little bit more than the minimum can go a long way.

In the example above, the original minimum payment on the $5,000 balance was $125. Each month, that minimum payment amount decreases by a dollar or two as you pay down the debt. But say, instead of making the minimum payment, you commit to paying $200 each month. You could pay the debt off in 32 months, and you will have paid $1,313.96 in interest.

Aim to pay as much as you can of your credit card debt each month, because the more you can pay, the sooner you can be free from your debt—and the less you'll pay in interest overall.