Minimum credit card payment costs

Perhaps one of the most flexible things about a credit card is the ability to make a minimum payment on your balance each month instead of paying your balance in full.

How minimum payments are calculated

How minimum payments are calculated

The minimum payment is the lowest amount you can pay on your credit card balance and avoid a late payment penalty. As long as you pay the minimum amount by the due date, you are in good standing with your credit card company.

Although the smallest payment is the easiest payment, it is also the slowest way to pay off your credit card. If you only make the minimum payment on your credit card, it may take several years to pay off your balance. Not even that, you could end up spending hundreds, maybe even thousands, in interest by the time the balance is paid off.

The credit card agreement will describe how the minimum payment is calculated. This may be different for each of your credit cards.

Typically, minimum payments are calculated as a percentage (something like 1-3%) of your credit card balance. Your minimum payment may be higher if you have penalties, a recent history of late payments, or are behind your payments.

You do not have to try to calculate your minimum payment yourself. Your current minimum payment will be stated in your credit card statement every month.

Minimum payment, Maximum cost

Minimum payment, Maximum cost

To see the impact of paying off a credit card with only minimal payments, consider a $ 5,000 credit card balance, with 14% APR and a minimum payment as 2% of your credit card. With minimum payments only, it would take you 22 years and $ 5,887 in financial expenses to pay off this debt, not taking into account any fees you incurred for the duration of your credit card.

Increasing your payments to $ 125 per month would allow you to pay off the same debt in less than 6 years and spend only $ 1,775 in interest.

Not only does increasing your payments allow you to pay off your balance early, it also saves money in interest. In our example, you would save more than $ 4,000 just by increasing your payment and keeping it level until your balance is fully repaid.

Minimum payments are usually calculated as a percentage of your outstanding balance. One of the reasons it takes longer to pay off your balance with minimum payments is because the minimum payment decreases every month because your credit card balance decreases. Lower payment means less your balance is paid out every month.

Calculate the minimum payment timeline

Calculate the minimum payment timeline

Federal law requires that your credit card billing statement include the time it will take to pay off your credit card if you make only the minimum payment. Check a recent copy to see a timeline for your credit card. You may be surprised to see how many years it will take to pay your balance if it makes it easy for you to make a minimum payment.

You can also use a credit card payment calculator to calculate how long it will take to pay off your credit card with minimum payments.

The payout calculator will also show you the amount of interest you will pay when you make only the minimum payment and see how increasing your payment will help you pay your balance early.

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