The Minimum Payment on Your Credit Card Debt Might Not Be Enough: Here's Why

You might choose to make the minimum credit card payments each month, but is it hurting you in the long run? The minimum payment on your card is the lowest amount you can pay to the creditor for each billing cycle. If you can't pay at least that amount by the due date each month, contact your issuer now. 

By making the minimum payments, you'll avoid late fees and penalties. It'll also prevent credit bureaus from receiving missing-payment reports and tanking your credit score. But if you only cover the minimum payment, it won't help you pay off your credit card balance very quickly. 

The interest you'll have to pay on the amount of your remaining statement balance can add up to almost as much as your minimum payment sometimes. With rising interest rates, it's a good idea to try to lower your balance and reduce your debt sooner rather than later. 

It's important for credit card users to understand how minimum payments work so they can make the best decisions to pay down their debt.

How are credit card minimum payments determined?

The minimum payment is the lowest amount you can pay in any given month to avoid penalties and fees. Credit card companies generally use four different methods for calculating minimum payments, which will depend on the balance and interest rate of the credit card. Here are the ways in which yours might be calculated.

Percentage of your balance: If you owe a significant amount of money on your credit card, your minimum payment will likely be around 2% to 3% of your balance, Debt.com resident expert and certified public accountant Howard Dvorkin told CNET. However, it could also be as low as 1%.

"Credit card companies make more money when the minimum payment is lower so more money goes towards the interest rate and less towards the principal," Dvorkin explained.

Percentage of balance plus interest and fees: Some credit card companies will calculate your minimum payment by combining a lower percentage of your balance -- often 1% -- plus interest and fees from the past billing cycle.

Flat rate: If the unpaid balance on your credit card is relatively low, your minimum payment may be a fixed amount. There's no standard among credit card companies, but from a survey of eight major credit card issuers, we found that flat rates ranged from $20 to $41.

Full payment: If your balance is lower than what the credit card company would charge as a flat rate, for instance $15, your minimum payment will probably be the full balance for that month.

Your minimum payment and how your credit card company calculates it should be included in your credit card agreement.

How can I find my credit card agreement, and what's in it?

Your credit card agreement will include an explanation of exactly how your minimum payment will be calculated.

"Every credit card company is mandated by law to give you the credit card agreement," Dvorkin said. You can request the agreement through email, snail mail or find it on your bank's website. 

The Consumer Financial Protection Bureau also hosts a library of thousands of current credit card agreements from all credit card companies with more than 10,000 accounts, as required by the Credit Card Accountability Responsibility and Disclosure Act of 2009.

Here's what else you can find in your credit card agreement:

• What you can purchase with your credit card -- for instance, a store credit card versus a MasterCard or Visa card
• Your credit limit and how it could change
• Your annual percentage rate (APR, or your interest rate) and how it could change
• Foreign transaction fees
• How your minimum payment is calculated
• How to pay your bill
• How your credit card use is reported to credit bureaus
• How your personal info is shared
• What changes your issuer is allowed to make to your terms and conditions
• How your credit card company defines default and what that means
• What to do if you lose your credit card
• Info on closing your credit card account
• What to do if you have a billing dispute

What happens if I don't make the minimum payment each month?

If you don't pay the minimum amount each month, credit card companies will consider this a missed payment. In this case, you could be charged a late fee or incur a penalty APR, which is a high interest rate that's triggered by a late payment. The credit card company could also report your missed payment to the three credit bureaus. When this happens, the damage to your credit can last for up to seven years.

And the effects can continue to compound: "When you pay late, credit card companies can hit you with higher interest rates that won't drop," Dvorkin said. 

If you can't make the minimum payment, contact your lender as soon as possible to talk about your options. For instance, if you're waiting for a paycheck to make your credit card payment, see if you can move your due date until after payday. You can also ask your credit card company if they offer any relief programs.

Why should I pay more than the monthly minimum payment?

Depending on your APR and balance, most of your monthly minimum payment is likely going toward interest, and not paying down your principal. To put more money toward your principal debt, you'll need to pay more than the minimum monthly. 

The Credit Card Accountability Responsibility and Disclosure Act of 2009 requires creditors to provide details in every monthly statement about how long it will take to pay off a balance if you only make the minimum payment required, and how much interest will accrue during that time. That warning must also include the monthly amount needed to pay off your balance in three years and the total amount it would cost using that monthly payment. 

Your credit card statement will also include how much of your balance is interest, what your principal balance is and the APR that calculates the interest on your balance.

Dvorkin advises against only paying the minimum amount each month. "It's a trap to keep you in debt," he said. When you pay only the minimum amount, it can cause interest to build and it could take longer to pay off your total balance.

Read more: Credit Card No-Nos: 9 Bad Habits to Break in 2023

Let's break it down. If you owe $10,000 on your credit card with an interest rate of 18% and make minimum monthly payments of $200 (using 2% of the balance), it will take you more than 50 years to pay off your debt. In that time, you will have paid a hefty extra $28,397 in interest. That's nearly triple the amount you originally owed.

Since your minimum payment is based on a percentage of your balance here, as your balance decreases, so will your minimum payment. Making a fixed payment of $200 until your $10,000 balance is paid off would take less than eight years and cost you $8,622 in interest. That's almost $20,000 in savings. 

If you can't pay your statement balance in full each month, Capital One suggests paying as much of the balance as possible. Paying even double the minimum amount can help significantly.

Using the previous example of a $10,000 balance and 18% APR, if you paid double your 2% minimum, or 4% of your balance each month, it would take 13 and a half years to pay off your debt, but you'd pay only $5,874 in interest.

"The higher your outstanding balance, the more interest you'll pay, which can make it even more difficult to climb out of debt," said Colleen McCreary, consumer financial advocate at Credit Karma.

Looking for a new credit card? Here are the best cash-back credit cards and the best credit cards for everyday use.