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Credit cards can provide users with a variety of benefits, including rewards, convenience, and security. At the same time, they can also lead to high-interest debt if you aren’t careful.
In particular, the minimum payment feature on a credit card can give you some flexibility if you’re experiencing short-term financial hardship, such as unemployment or medical expenses. But if you make it a habit to pay only the minimum amount due each month, it can be easy to rack up a lot of credit card debt over time.
Understanding how to calculate a minimum credit card payment and how it can impact your financial well-being is crucial for developing responsible credit habits.
What is a minimum credit card payment?
It’s best to always pay your credit card balance on time and in full if possible. But if your budget is tight, your account’s minimum payment can provide a little relief—albeit at a cost.
The minimum payment on a credit card is the lowest amount you’re required to pay each month. Depending on the card issuer, it could range anywhere from 1% to 5% of your statement balance — or more if your balance is very small.
While it’s generally only a small fraction of your total balance, paying the minimum amount by your credit card’s monthly due date will ensure that you avoid certain consequences, such as late fees. That said, it can also be costly in the long run and even wreak havoc on your financial security.
How to calculate your minimum credit card payment
Ultimately, how your minimum payment is calculated depends on your credit card issuer. The most common ways to calculate a minimum credit card payment include:
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Flat percentage: Some may simply charge a flat percentage, such as 2%, of your statement balance for the month.
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Percentage plus interest and fees: If you’ve carried a balance from the previous month, your card issuer may charge a flat percentage, say 1%, plus interest and fees that have accrued since your last payment. If you have a past-due payment from a previous month, that may also be tacked on.
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The greater of one of the above: Some card issuers may determine your rate based on the greater of a flat percentage of your balance or a lower percentage plus interest and fees.
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Flat amount: For smaller balances, the card issuer may simply charge a flat amount.
Some credit card issuers also offer fixed installment plans for select purchases. For example, you can get Citi Flex Pay on purchases of $75 or more on cards like the Citi Premier® Card and Citi® Double Cash Card.
American Express offers a similar option called Plan It on purchases of $100 or more with cards like the Blue Cash Preferred Card® from American Express (see rates and fees) and Amex EveryDay® Preferred Credit Card (see rates and fees).
If your card offers such an installment plan, the plan’s monthly payment may also be added to your minimum amount due.
How to find out how your card issuer calculates your payment
The cardholder agreement you receive in the mail when you first get your card will outline the formula. You may also be able to access the info from the card agreement on the issuer’s website. Here are a few examples of minimum payment calculations from credit cards today:
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Capital One Platinum Credit Card: $25 or 1% of your balance, whichever is greater (plus any interest or late fees; you’ll owe the full balance if it’s less than $25).
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OpenSky® Secured Visa® Credit Card: The greatest amount between interest and fees charged to your account, 2% of your balance, or $25 (plus any amount past due or that exceeds your credit limit). If your balance is less than $25, you’ll owe the full amount.
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Blue Cash Everyday® Card from American Express: The highest among interest charged plus 1% of your balance, 2% of balance, or $40 (plus any penalty fees, a percentage of overlimit amounts, past due amounts, and plan payments; see rates and fees).
If you no longer have the cardholder agreement, you can call the number on the back of your card and request a new one or simply ask the representative to provide the information you need.
Can’t decide on a credit card? Check out Yahoo’s best credit card picks
What happens if you only pay the minimum amount due?
While a minimum payment can appear to be budget-friendly, there are some consequences to consider, especially if you make it a habit to pay only the minimum. Here are some ramifications to consider before deciding how to handle your credit card payments:
You’ll be charged interest
If you don’t pay your balance in full each month, you’ll be charged interest on the amount you carry over to the following month. Your monthly statement will typically provide a “minimum payment warning,” which explains that paying only the minimum amount due will result in interest charges.
With some cards, such as the Chase Freedom Flex℠, you may even get an example to show how long it’ll take you to pay off your balance by paying just the minimum and what you’ll pay in interest.
You’ll lose your card’s grace period
Credit cards typically offer a grace period on purchases, which is the period between your statement date and your due date. During this time, you won’t be charged interest on purchases made during the last billing cycle as long as you pay your balance in full.
Grace periods can vary depending on the card. With the Chase Sapphire Preferred® Card, for instance, it’s a minimum of 21 days. But with the Capital One Venture Rewards Credit Card, it’s 25 days or more. That said, it can’t be shorter than 21 days.
If you don’t pay your balance in full, however, you’ll lose your grace period until you pay it in full. In other words, all new purchases you make with the card will start accruing interest from the date of the transaction.
You may never pay off your debt
In extreme cases, the minimum amount due may not be enough to cover interest charges, let alone a portion of the principal balance. In this scenario, you’ll never put enough toward your balance to pay it off if you only make the minimum payment.
What happens if you don’t make your minimum payment?
While paying just the minimum amount each month can be costly, missing your payment entirely could have more drastic consequences. In addition to interest charges on your balance, here’s what else may be in store for you if you don’t pay your monthly minimum:
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Late fee: Credit card issuers may charge a fee of up to $41 if you don’t pay by the cutoff time on your due date. For some card issuers, the cutoff time is midnight, but others may set an earlier deadline.
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Credit score damage: If you miss a payment by 30 days or more, the card issuer may report the delinquency to the credit bureaus. Since your payment history is the most influential factor in your FICO credit score, just one missed payment can have a devastating impact on your score.
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Penalty APR: If you go 60 days without making a payment — or shorter for some business credit cards — your card issuer may assess a penalty APR. This interest rate is higher than your regular purchase APR and will remain in place for at least six months.
Keep in mind
Understanding how to calculate your minimum credit card payment can give you some clarity on the terms of your account. But it’s also crucial to acknowledge the downsides of paying only the minimum amount due every month, especially over a long period of time.
Unless you’re experiencing money difficulties, make it a goal to always pay your credit card balance on time and in full. If you are dealing with financial hardship, your card’s minimum payment can give you some much-needed flexibility. But consider making a plan to get your money situation back on track as quickly as possible to minimize the costs of paying only a small portion of your balance each month.
Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn’t include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.