Minimum Payment

Minimum payment or minimum monthly payment is the smallest amount of money you can pay on your credit card account to keep it in good standing with the credit card issuer.

This payment is usually calculated as a small fraction of your total balance, around 2% or 3%, or just a flat fee, such as $25. The minimum payment ensures you remain in good standing with your credit card issuer and avoid penalties, like late fees or increased interest rates.

In almost all cases, the minimum payment will help you avoid additional penalty fees on your credit card. The downside, however, is that it is costly - you will acquire more interest on your credit card debt.

Benefits and Downsides of Minimum Monthly Payments

Benefits:

Avoid Late Fees: You will not be charged late fees by your credit card company.

Maintain Good Standing: Keeps your account in good standing and prevents negative actions - such as increased interest rates, penalty fees, or your account being sent to collections.

Flexibility: This is the flexible option and the best Plan B if you're facing financial difficulties. In such a scenario using the minimum payment option helps you to manage your cash flow more easily.

Downsides:

High-Interest Costs: Paying only the minimum means increasing the money you will spend on interest.

Longer Repayment Period: It will take you much longer to pay off your debt, especially if you make minimum payments for more than one month.

Debt Cycle Risk: Relying on minimum payments can lead to a debt spiral, and acquire even more debt in the long run.

What is a Minimum Payment Warning?

With the introduction of the Credit Card Act of 2009, card issuers are legally required to include a "minimum payment warning" on each billing statement for a credit card.

This warning should inform you about the potential consequences of making only the minimum payment and show you how long it will take to pay off your balance if you only make the minimum payment each month.

It can also include the total amount you will have to pay, including interest.

This warning is meant to help consumers understand the cost of paying only the minimum and encourage them to pay more when possible to reduce their debt faster and save on interest.

Does Making Minimum Payments Affect Credit Reports and Credit Scores?

Yes, making minimum payments affects your credit reports and credit scores, but how it affects them depends on your overall payment behavior.

Positive Impact: Making at least the minimum payment on time can help maintain or even improve your credit score, as payment history is the most significant factor in credit scoring models.

Negative Impact: If you miss a minimum payment, it can lead to late fees, a potential increase in your interest rate, and a negative mark on your credit report. This can significantly lower your credit score and make it harder to get credit in the future.

Potential Negative Effect: If you make minimum payments often you may increase your credit utilization ratio - this is the ratio between the amount of the revolving credit you're using, divided by the total credit available. As a rule of thumb, it's considered that a credit utilization ratio of 30% or higher could affect your overall credit score.