Your minimum payment is usually a small percentage of the total balance on your credit card. It’s tempting just to make that minimum payment and forget about the balance for another month, but that choice can have serious consequences. If you keep using your card but make only minimum payments, you can quickly run up a large debt at a dangerously high-interest rate. You could also harm your credit. Paying your card in full every month is the best approach, but if you can’t do that, there are strategies that can help you break out of the minimum payment trap.
What Is a Minimum Payment?
The minimum payment is the smallest payment you can make without incurring penalties. If you don’t make the minimum payment, you will probably face a late fee and your interest rate may increase.
Each card provider has their own formula for calculating minimum payments. The minimum payment may be a fixed dollar amount or a percentage of your balance. The percentage is usually small, often from 1% to 3%. Fees and accrued interest may be added to this amount.
Making the minimum payment will prevent immediate problems but making only the minimum payment can set you up for serious consequences in the future, especially if you continue to charge more every month than you pay.
Making Only the Minimum Payment Can Be Expensive
If you pay your card off in full every month, you pay no interest. If you do not pay the complete amount on your bill every month, the provider charges interest on the balance. Credit card debt carries can carry high-interest rates. The average card charged 15.99% on interest-bearing accounts in 2018, and many cards have interest rates above 20%.
Because the minimum payment is usually only a small percentage of the balance, making only the minimum payment leaves most of the balance unpaid. You will then be paying interest on the unpaid balance.
Making only the minimum payment for several months in a row can quickly run up a large balance if you continue to make purchases with your card. That balance will accumulate large interest charges. Even if you stop using the card, it can take months or years to pay off both that balance and the interest if you’re only making minimum payments.
Making Only Minimum Payments Can Damage Your Credit
Making only minimum payments on your card may leave a significant balance, which can raise your credit utilization rate.
Your credit utilization rate is the percentage of your available credit that you use. If the balance on your card is half of your credit limit, your credit utilization on that card is 50%. Credit utilization is an important part of your credit score. Experts recommend keeping credit utilization below 30%.
If you make only minimum payments, your utilization rate may go above this level, especially if you keep making purchases on your card. That can hurt your credit.
Total debt is also a component of some scoring models. If you’re making only minimum payments, you will not be significantly reducing your total debt. If you keep making purchases with your card, your total debt may continue to rise, which can affect your credit.
If your balance and interest payments keep rising, your minimum payment will also go up. You may reach a point where you can’t make the minimum payment. Missing a payment can do serious damage to your credit.
What Can I Do If I Can’t Pay My Balance in Full?
If you usually pay your balance in full, but you miss a month because of an unexpected financial emergency, don’t worry too much. Covering those emergencies is one of the reasons for having a credit card. You will want to pay that balance off as fast as possible, but if your financial situation is sound, you will be able to do that.
Making the minimum payment is better than nothing, but it does not solve the problem. Adding even a small amount to the minimum payment every month can pay off a balance much faster. Pay as much of your balance as you can every month, even if it means cutting other items in your budget. The sooner you pay that balance off, the less interest you will pay.
Making more than the minimum payment is important, but you also need to keep your spending under control. If your spending on your card is larger than your payment, your balance and your interest payments will keep growing.
What If I Have Balances on Several Cards?
Many credit card users find themselves with balances on multiple cards. This is a situation that can easily get out of control and you will have to stay focused to resolve it.
One strategy is to focus on the card with the highest interest rate first. Make only minimum payments on your other cards and put all your available cash into paying off that balance. When it’s done, move on to the card with the next highest rate.
You could also focus on your smallest debt first and move on to the others when it’s paid. You will still have to make the minimum payment on your other cards. The accomplishment of paying off that smallest debt can motivate you to tackle a larger one.
You may wish to consider a debt consolidation loan. If you can get a personal loan at a lower interest rate than that of you can pay off your credit card debt with the money. Then you have only a single monthly payment to worry about, and your interest rate will be lower. A credit union can be a good source of low-interest personal loans.
These strategies will only work if you control your spending and avoid placing new charges on your cards. Consider switching to a debit card for day-to-day use if you’re having problems managing your credit card use.
What If I Can’t Make the Minimum Payment?
Missing a credit card payment can have serious consequences, and you should do everything possible to pay at least the minimum. If there’s no way to avoid missing a payment, take the initiative. Call your credit card provider and notify them that you will be missing a payment. Explain why you can’t pay and what you’re doing to correct the problem and ask them to waive the penalties. If you have a good payment record, they are likely to agree.
If your provider agrees to waive the penalties, you still have to pay the bill as soon as possible. If you ask again next month you may not get such a favorable answer. Reassess your spending, get credit counseling if you need it, and work to get your finances in order.
The Bottom Line
Credit cards are a useful tool and using them responsibly can help you maintain a good credit history. Credit cards also carry high-interest rates, and if you use them too often and fail to pay your balance off every month, you can easily find yourself buried in high-interest debt.
Making only the minimum payment on your card can cost you money and could harm your credit. If you’re only able to make minimum payments on a regular basis, you may need to reassess your finances or seek credit counseling.
Making the minimum payment may make the problem go away for another month, but you’re just kicking the problem down the road. It will come back and it will get worse. It’s better to face the problem and take action to solve it.