Why You Shouldn’t Just Make Minimum Credit Card Payments


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The Chase Freedom® is currently not available to new cardholders. Please see our list of best refund cards for alternative options.

A minimum payment is often the smallest number on your credit card statement, but it’s one of the most important. Your minimum payment is the amount you must pay by the due date in order to keep your account up to date and in good standing.

If you pay less than the minimum or miss a payment, you can harm your credit score. And while you should always pay at least the minimum owed, you should strive to pay off your balance in full to avoid costly interest charges.

Below, CNBC Select breaks down the amount you would end up paying in interest if you only made minimum payments on your credit card balance.

How credit card issuers calculate minimum payments

Before we dive into an example of what it could cost the average American if they only make minimum payments, let’s first take a look at how a minimum payment is calculated.

Many credit card issuers calculate your minimum payment as the greater of the following amounts:

  • A fixed amount, usually $ 35
  • A percentage of your balance, plus interest charges and late fees

For example, the terms of the Chase Freedom® Credit Card State:

Minimum payment: We will calculate the minimum payment as the greater of the following amounts: 1) $ 35 (or the total amount you owe if it is less than $ 35); or 2) the sum of 1% of the new balance, the periodic interest charges and late fees that we charged you on the statement for which your minimum payment is calculated.

Consider three scenarios:

  1. The above calculation equals $ 147, so your minimum payout would be $ 147.
  2. The above calculation equals $ 33, so your minimum payout would be $ 35.
  3. Your balance is less than $ 35, so your minimum payment would simply be equal to your balance amount.

The real cost of making only minimum payments

Making only minimal payments on your credit card can dramatically extend the time it takes to pay off debt while increasing the amount of interest you pay.

On average, Americans have $ 6,194 in credit card debt, which can lead to high interest charges if you only pay the minimum on a high interest rate card.

In order to calculate the true cost of making only minimal payments on a credit card, we used a balance of $ 6,194 and an interest rate of about 16.61%, which is the average of the cards. credit. APR according to Federal most recent data from February 2020. We used the definition of minimum payment above, using the greater of $ 35 or 1% of your balance plus interest charges and assumed no late fees or penalties.

By calculating the numbers, we calculated that it would take you about 17 years and three months to pay off your debt if you only paid the minimum. During that time, you would pay a total of $ 7,286 in interest, bringing the total amount of all your payments to $ 13,480.

Payment deadline : 17 years and three months

Total paid in interest: $ 7,286

Total paid in all: $ 13,480

Remember that your original (principal) balance was $ 6,194, which means you would pay more interest ($ 7,286) than your principal balance.

Now that you understand the real cost of making only minimum payments, you should make a goal of paying off your credit card balance in full each month.

Certainly there may be times when you are confronted Financial difficulty that require you to temporarily make only minimum payments, but once you’re in a better financial situation, you can start paying off your balance in full.

What if you can’t pay more than the minimum

If you’re having trouble making more than the minimum payments, there are relief options. You may want to consider transferring your debt to a balance transfer card which offers no interest for up to 18 months, such as Citi Simplicity® Card – No late fees (after the introductory period, a variable APR of 14.74% to 24.74% applies). Balance transfers must be made within 4 months of opening the account.

During the interest-free introductory period, you will not pay interest on your transferred balance and will be able to enjoy all of your payments going to your principal balance – instead of principal plus interest – as long as you pay off your debt before the due date. 0% APR ends.

If you still have a balance after the introductory period is over, you will begin to incur interest at the Standard APR. In addition, some cards may charge deferred interest (i.e. any interest you would have been charged during the introductory period), but the cards mentioned here have no deferred interest.

Note that most balance transfer cards require good credit Where excellent credit (scores 670 and above). If your credit rating drops below 670, you may need to build credit before you can open a balance transfer card.

However, there is a balance transfer card for people with fair credit (grades 580 to 669) – the Aspire Platinum Mastercard®. With the Aspire card, you can benefit from a 0% APR for the first six billing cycles on balance transfers and purchases (after 8.15% to 18.00% variable APR).

In addition to credit score requirements, you may not be able to transfer your full balance since card issuers often place limits on the amount of debt you can transfer.

If a credit card with balance transfer isn’t an option for you, you may want to consider credit card forbearance programs which can provide temporary relief from late fees and monthly payments. These temporary programs can protect your credit score while you can’t make your payments, but you will likely incur interest while forborne, so use them sparingly.

Information about the Chase Freedom® and the Aspire Platinum Mastercard® was independently collected by CNBC and was not reviewed or provided by the card issuer prior to posting.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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