If you have a top-rated credit card, you will typically find a section titled ‘minimum payment’ on your monthly statement. So what exactly is this minimum payment? How is it calculated? And what happens if you don’t pay it? We have the answers.
What is a credit card minimum payment?
The minimum payment listed on your monthly credit card bill is, as the name suggests, the minimum amount you must pay towards your credit card balance in order to avoid paying late fees and charges.
How is it calculated?
Your minimum payment is typically calculated as a percentage of your current balance (plus interest due for that month and other charges or fees included as part of the card’s usage), or a set amount of cash, whichever is greater. It may also be determined by your credit card provider’s rules.
Typical minimum repayments for most credit cards are in the range of 1%-3% of what you owe (plus interest and charges) or £5-£25, whichever is higher.
So, your card minimum payment could be something like 3% (plus interest and charges) or £25.
What happens if you don’t make the minimum payment?
There are several possible consequences of not making your minimum payment. First, you can expect a late fee. This could increase your APR and have a negative impact on your credit score.
If you miss several payments, your account may be placed in default. And if you still don’t pay, your account may be sold to a debt collection agency.
If you are financially constrained and think that you might not be able to meet your next minimum payment, the best idea is to contact your credit card company before the due date.
They might provide some guidance on what to do and might even be willing to work out a compromise.
Is it a good idea to only make the minimum payment?
Minimum payments help you avoid late fees and charges and therefore preserve your current credit score.
The problem with making only the minimum payment is that it costs more in the long run. That’s because if you only pay the minimum, you simply reduce a small portion of your balance. Therefore, you’ll end up paying a large amount of interest down the road. This also means that it will take you longer to pay off your debt.
For example, if you have a £2,000 balance on a credit card with an 18% interest rate, by making only the minimum required payment (3%, for example), it would take almost 14 years to pay off the entire £2,000 balance! And that is only if you don’t add any further purchases to the card. During this time, you would have to pay £1,798.88 in interest charges. That’s nearly the same as your starting balance.
The long period to pay off the balance plus the huge interest charges are a big incentive to make you want to pay more than the minimum amount.
Basically, by making more than the minimum payment, you’ll bring down your balance quicker, meaning less total interest. For example, if you increased your monthly payment to £500 per month instead of the minimum amount, your balance would be paid off after just five months (i.e. 13 years and several months sooner). You’ll also pay way less in interest (£72 to be exact).
If you use credit cards, you are almost always better off paying more than the minimum balance, or paying off the balance in full wherever possible.
You can use our credit card repayment calculator to work out how much less interest you’ll pay by increasing your monthly payments. You can also see how much sooner you can pay off your current credit card debt as a result.