When applying for or using a credit card, the term “minimum payment” appears frequently. It’s important to be aware of minimum payments and their effects on your finances.

What Is A Minimum Payment?

A minimum payment is the minimum amount you need to pay on a credit card bill each month. It will appear on each statement.

How Are Minimum Payments Determined?

Typically, a minimum payment is a set percentage of your balance. Of course, each month your interest rate will also compound the unpaid balance on your card. It is important to keep in mind both of these numbers when paying your credit card bill.

Minimum payments are usually anywhere from 2% to 4% of your card balance. However, these percentages will vary from card to card. They may also vary depending on your balance.

For example, if you had a $1500 balance and a 2.5% minimum payment, you would need to pay at least $37.50 a month.

Are Minimum Payments Advisable?

It’s well known that minimum payments should be a last resort. Though minimum payments are an option, using a minimum payment exclusively could dramatically increase your debt and payment time.

Using our example from above, let’s assume that your $1500 balance has an 18% interest rate. By only making the minimum payment each month, it would take 194 months to pay off the debt. In addition, you would pay over $1800 in interest- more than your initial debt.

As this example shows, minimum payments should be utilized infrequently. It’s to your financial advantage to pay off your credit card debt as quickly as possible.

Using Minimum Payments to Your Advantage

Minimum payments can, occasionally, help you delay full payment on your debt. However, it is important to be highly aware of the risks and increased financial responsibilities minimum payments can result in.

This article is part of TakingCredit.com’s credit card glossary. You can learn more about credit through our archive of credit card tips and our credit card blog. Photo by R-Z.

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