Why You Should Never Pay Just the Minimum on Your Credit Card

It’s tempting: Pay the smallest amount possible toward your credit card bill and move on. You avoid a late fee and get extra money in your pocket for the month. Why not?

The move will certainly make your issuer happy because the minimum payment means big profits in the long run. For you, the drawbacks are triple. The minimum payment prolongs the time it takes to pay off debt, increases the amount of money you ultimately pay your issuer, and diminishes your creditworthiness. Is it time to reconsider?

What is it?

A minimum payment is the least amount of money you can put toward your credit card balance each month without getting penalized with a fee. How it’s calculated isn’t standard and depends on the issuer. To find out how your issuer calculates the minimum payment, you can check here or in your cards terms and conditions. But here are three common methods.

By percentage: Some credit card issuers determine your minimum payment as a percentage of your total new balance—typically between 1% and 3%. For instance, if your credit card balance is $600 and the minimum payment is 2% of that, then you must pay $12 to keep your account current.

Percentage, interest and fees: Another method issuers use to figure out your minimum balance is to add a percentage of the balance to any outstanding interest charges and fees. Say your credit card charges a 16% APR and you have a $200 balance from the prior month. You also got charged a late fee of $25 last month for an untimely payment. You also added an additional $500 in purchases on your card this month. Here’s what your minimum payment would look like:

$14 (2% of your total balance of $700)

$6.14 (interest on $700 balance)

$25 (late fee)

Total: $45.14

Defined amount: Some issuers also will set an absolute minimum amount for the minimum payment to establish a floor. That way, you’re not just paying just $2 on a balance of $100—if the minimum payment is based on 2% of the balance. For instance, Discover will charge $35 as the minimum payment if it’s greater than 2% of the new outstanding balance, or $20 plus any fees and interest.

Here’s the math

Paying just the minimum means you’ll spend years longer working down your debt and forking over much more in interest payments because the interest compounds daily. The amount of interest you pay can easily exceed the original balance on your credit card if you stick to the minimum. Consider the following scenarios to pay off a $3,000 credit card balance, assuming the card has a 15% APR and the minimum payment is 2% of the balance.

Monthly PaymentTime to Pay Off BalanceTotal Interest
Minimum payment*16 years, 4 months$3,640
$1003 years, 1 month$724

**Starts at $60/month and is recalculated every month after that

Online calculators like the one from ValuePenguin can help you determine how long it will take to pay off a credit card debt using different payment amounts. Your credit card statement also includes a payoff estimate, comparing the minimum payment timeline to one that eliminates the debt within three years. The disclosure was mandated by the Credit CARD Act of 2009 and various studies showed that it had modestly discouraged consumers from paying the minimum.

Other effects of minimum payments

Aside from ballooning the amount of interest you’ll pay, the minimum payment also doesn’t help your credit reputation. A 2013 study from credit bureau TransUnion found that consumers who consistently paid just the minimum on their credit card bills had higher delinquency rates on their credit obligations compared with consumers who paid more than the minimum or the entire bill each month.

Those results helped to spark interest in differentiating between minimum payers and those who pay more. Fannie Mae—which guarantees many mortgages—now requires trended data that shows, among other things, whether a mortgage applicant pays just the minimum on their credit cards. That information is considered as part of the approval process, and minimum payers may get a higher mortgage rate to compensate for their extra risk.

VantageScore--which provides credit scores to lenders--this year introduced its newest score that takes into account whether a person pays the minimum or more on their credit cards. Paying more boosts the score, helping you to get better terms and rates on credit.

The lesson? Skip the minimum payment and stretch to pay a little bit more. Your credit profile will benefit, and so will your bank account over the long term.

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