What Happens if You Only Pay the Minimum on Your Credit Cards?

Bills, bills, bills — we all have them, yet none of us want them. Unfortunately, they’re a reality for most of us who carry around a credit card or line of credit. They join a long list of expenses that you need to take care of every month.

But unlike the water bill or your insurance premiums, these revolving credit products come with a special payment option: the minimum payment. 

A minimum payment is the least amount of money you need to pay to keep a line of credit or credit card in good standing. As long as you pay it before or by the due date, you’ll avoid late fees.

As a small percentage or flat fee, the minimum is a fraction of your overall balance, so it’s a whole lot easier to cover if you’re short on cash. In a tight month, it frees up your budget for more important purchases, like taking your son to the dentist or buying a new pair of work shoes. 

Anytime you can pay less than you have to seems like a major win for your finances. But you could be setting yourself up for a big loss if you only ever rely on the minimum payment every time. It digs you into deeper debt that can take ages to pay off. 

How a Minimum Payment Works

Generally speaking, the minimum is a small percentage of your balance, usually 2–4%, or a fixed amount of $10–25 — whichever is greater. What you pay depends on many factors, including your lender’s policies, account details, and payment history. 

No matter how you slice it, the minimum gives you an easy way out of paying off your full balance without facing a late fine. But what you save in late fees, you’ll more than gain back in interest and finance charges, especially if you consistently rely on this payment.

Whenever you rely on the minimum, the remaining balance carries over to the next month’s bill where it accrues interest and finance charges. These charges roll over every month you rely on the minimum.

Calculating the Long-Term Cost of Paying the Bare Minimum

The above definition talks in hypotheticals, so let’s switch gears. Seeing the minimum payment in action is the best way to understand just how much it winds up costing you. 

Let’s say you have a line of credit with a balance of $5,000 and an APR of 20.29%, which is the average interest rate at the time this article was written.

If your minimum payment is 4%, it would take you nearly 12 years to bring your balance to zero, and you would spend $8,503 to cover the extra fees.

If your minimum payment is 2%, it would take you more than 30 years to say goodbye to this debt! During that time, you’d pay $23,431 in total.

That’s a lot of money, considering you only started out with $5,000! And this doesn’t factor in any additional charges you make to your account, so these calculations only hold true if you don’t put another penny onto your card or line. If you continue to use your accounts until you max them out, you’ll end up paying even more. 

Reasons Why it’s Time to Ditch the Minimum 

If you’re serious about kicking debt to the curb, it’s time to forget about the minimum. Budgeting so that you can make larger payments against your balances comes with these considerable perks.

You Save Money

Scroll back up to the examples above. You’ll see that even a two percent increase in the size of your payments creates a significant difference in your time and cost. 

The more you can put toward your balance, the wider these differences become. 

Ideally, you can pay your entire balance each billing cycle. Stripping your account back down to zero will reduce what you pay in interest and finance charges. However, any increase from the minimum will save you money, so do what you can to double down on your minimum. 

You Free up Your Available Limit

The bigger your payments are, the more you’ll free up your limit. If you can bring your balance down to $0, you’ll have your entire limit available to use at your discretion.

This does “future you” a big favor in case you need your line of credit again. Although your ultimate aim is to get out of debt, having available credit comes in handy in an emergency. 

That’s why the line of credit experts at MoneyKey recommend you pay off as much as you can, whenever you can. You’ll have money on standby for unexpected essentials, even if you run out of savings. 

Suppose your car breaks down on the side of the road out of the blue one day. With your limit free, you can put this repair on your line of credit and get back on the road without delay. 

You Protect Your Credit Utilization Ratio

Your utilization ratio is the second most important factor of your credit score. Worth 30% of your overall score, this ratio measures how much credit you use compared to your total available limits.

Sound complicated? Don’t worry — calculating it is simple. 

If you want to find an individual account’s ratio, divide your balance by its total limit and multiply it by 100. To find your overall ratio, you’ll have to add up all your balances and divide this sum by the sum of all your limits. 

Financial advisors recommend keeping your ratio below 30%. In fact, the lower, the better. People with perfect credit scores tend to keep their ratios below 10%. 

Anything higher than 30% casts doubt on your money management style. It suggests you have to lean on credit heavily, and you don’t have a plan to pay off your debt. By paying more than your minimum, you’re on your way to managing your ratio responsibly, which could impact your overall credit score positively. 

You Become a Better Budgeter

The minimum payment can make any purchase seem affordable. It doesn’t matter how expensive a brand-new home entertainment system is as long as you have space on your account. You can upgrade your entertainment system even when you don’t have the cash to pay it off in one go. 

But as you’ve learned today, this makes any purchase more expensive. APR bumps up the price tag of anything you don’t pay off right away. You’ll also tie up your limits and potentially even do damage to your credit score.

But if you’re serious about paying off debt, you’ll do what it takes to make more than your minimum. You’ll use your budget to make sure you charge only what you can realistically repay by your next billing statement. You can use these new skills to budget better in all areas of your life. 

The Takeaway

On the surface, there’s no contest between making your minimum payment or paying off your full balance. The minimum is easier to juggle with your other monthly expenses.

But dig a little deeper, and you’ll see how deceiving the minimum payment is. If you only ever make the minimum, you’ll rack up interest and finance charges, tie up your limit, and stay in debt longer. 

That said, everyone’s human. Some months you’ll appreciate having the option of the minimum, so don’t beat yourself up if you slip up. Just try to do better next month. 

The minimum is not a long-term strategy for paying your bills or getting out of debt. So, pay off your balance in full, if you can. And if you can’t, check in with your budget to pay as much as you can to start.

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