Minimum Payment
How the minimum payment is calculated, why paying only the minimum is a debt trap, and what it costs you over time.
What is the minimum payment?
The minimum payment is the smallest amount you are required to pay on your credit card statement each month to keep your account in good standing and avoid a late fee.
How it is calculated
Most issuers calculate the minimum payment as the greater of:
- A flat dollar floor (often $25 or $35), or
- A percentage of your current balance plus interest and fees (typically 1% to 2% of the balance, plus that month's interest charges)
Example: You have a $3,000 balance at 22% APR. Monthly interest is about $55. At 1% plus interest, your minimum payment is roughly $85. That $85 looks manageable. The problem is what happens when you only ever pay $85.
The debt trap illustrated
If you carry that $3,000 balance and only pay the minimum each month:
- It takes over 20 years to pay off the balance
- You pay more than $4,200 in interest over that time
- Your total cost is more than $7,200 on a $3,000 debt
If instead you paid $150 per month on that same balance, you would pay it off in about 2 years and owe roughly $650 in interest. Same debt, dramatically different outcomes.
Why the minimum payment is set so low
The minimum payment formula is designed by the issuer to maximize interest income over time. A low minimum keeps you indebted longer, which generates more revenue. The Credit CARD Act of 2009 now requires issuers to show you on your statement how long it takes to pay off your balance paying only the minimum, plus the total interest cost. Look for that disclosure on your statement.
What to do instead
Pay more than the minimum every month, ideally the full statement balance. If you cannot pay in full, pay as much as you can and target the card with the highest APR first (the avalanche method). Even paying twice the minimum cuts payoff time dramatically. See grace period for why paying in full each month is the goal.