Credit cards come with lots of terms and conditions, but there's one factor that's especially important: minimum payments.
To best manage debt, customers should understand what minimum payments are, how they are calculated, and what happens if you pay or miss the minimum payment.
What Is a Credit Card Minimum Payment?
A credit card minimum payment is the smallest amount you must pay each monthly billing cycle to keep your account up to date and avoid penalties and fees.
How Is Your Minimum Payment Calculated?
Policies vary from company to company. Minimum payments can be based on either a percent of the amount you spent with your card (known as the “principal balance”), the same flat amount every month, or a combination of percentage and flat rate. By checking your credit card issuer’s terms and conditions, you’ll know how they calculate your minimum payment.
If your credit card company uses the percent of principal balance method, the minimum payment you owe is calculated using the formula below. The formula is defined by the Office of the Comptroller of the Currency — a part of the United States Department of the Treasury:
Minimum Payment = A Percent of Principal Balance + Fees + Interest
Your credit card company may also apply a minimum payment floor, which is the absolute lowest amount your minimum payment can be. If the minimum payment calculated using the formula above is less than the floor amount, you will owe the floor amount as your minimum instead. This is typically $25 but may vary by credit card company.
Interest is the cost of borrowing money. If you pay your balance in full each month you avoid interest. Learn more about interest and how it is calculated here.
Can Monthly Minimums Change from Month to Month?
Yes! In fact, it's actually common for the minimum you owe to change from month to month. Let’s look at three scenarios to see how they would affect your minimum payment.
What Happens If You Miss Your Minimum Payment or Pay Less Than the Minimum Payment?
First of all, according to the Consumer Financial Protection Bureau, “You cannot be charged a late fee if you paid at least the minimum amount due and your payment was received by 5 p.m. (in the time zone where payments are sent) on the date it was due.”
However, if you either pay less than the minimum required or miss a payment entirely, even by a day, you'll probably be charged a late fee. The first time that happens, the credit card company can charge a fee of up to $27. A second time within the next six billing cycles can mean another fee of up to $38. The Consumer Financial Protection Bureau notes that the late fee “can never be more than the minimum amount due.”
The late fee will be added to what you owe. So, at the start of the next cycle following a missed payment, the minimum payment due will be:
Minimum Payment = The Original Missed Minimum Payment + New Minimum Payment Amount + Fees + Interest.
Additionally, some credit card issuers may penalize you for missing a monthly minimum payment by increasing your interest rate (known as your “annual percentage rate” or APR) or calculating future minimums using a higher percentage of the balance. Finally, if you miss a monthly payment, your credit card company may report the missed payment to credit bureaus.
If you find yourself in a situation where you are having trouble making your card payments, your credit card company may be willing to work with you to work out a solution for your debt, if you contact them directly.
What Happens If You Make Your Minimum Payment?
Paying the minimum required keeps your account up to date. As long as you have not hit your credit limit, you will be able to continue using your card to make purchases. You typically won’t face any late fees or penalties, and your interest rate will typically stay the same or even improve. However, if you don’t pay your account balance in full each month, interest will still be charged.
What Happens If You Pay More Than Your Minimum Payment?
Paying more than the minimum required can help cover the interest charged while also decreasing the total balance. This pays off debt more quickly than making the minimum payments and minimizes interest owed. If you can, you should always pay as close to the full balance as possible.
Does Making Minimum Payments Affect Your Credit Report?
Credit card companies usually report account activity — including payment information whether late or on time — and balance each month to the credit bureaus. While each of the major credit bureaus — Equifax, Experian and Transunion — has its own score model, the less you owe and the more on-time payments you make, the better that is likely to be for your credit score.
What Other Factors May Affect the Minimum Payment Due?
Some credit card companies charge fees or interest for certain services. This can increase the total debt and the minimum payment you owe. For example, a credit card company may apply fees and higher interest rates for things like balance transfers and cash advances.
What’s A Good First Step To Take If You Can’t Make Your Minimum Payment?
Sometimes, you hit tough times. If you find yourself in a situation where you cannot make your minimum payment, know that you can contact your credit card company directly. They may be open to working out a solution that helps you get back on track.
And to learn more about other options, see our articles on the 5 types of debt relief.