DEFINITION OF ‘MINIMUM PAYMENT’
The smallest amount of a credit card bill that a credit card holder must pay each billing cycle. The minimum payment is usually based on one of three things: a flat minimum dollar amount, such as $35; a percentage of your new balance — usually a small percentage, such as 2%; or your interest charges and late fee plus a flat dollar amount, such as $20. However, if your statement balance is smaller than the lowest of these calculations — if your balance is $12, for example — then your minimum payment will be the same as your balance.
INVESTOPEDIA EXPLAINS ‘MINIMUM PAYMENT’
Read your credit card’s terms and conditions, sometimes called the “cardmember agreement,” “cardholder agreement” or something similar, to see how your card issuer calculates the minimum payment for your card. You are not required to pay more than the minimum payment, but any portion of your balance that you don’t pay will accrue interest unless you have qualified for a 0% APR offer. Also, if you don’t make the minimum payment by the due date, you will usually be charged a late fee.
Making only the minimum payment on your credit card is a good way to stay in debt long term and spend lots of money on interest. For example, if your credit card balance is $5,000, your interest rate is 18%, and your minimum payment is $100, making only the minimum payment means it will take you 472 months, or more than 39 years, to pay off your balance. What’s more, you will pay almost $14,000 in interest. If you commit to putting $500 a month toward your $5,000 balance, however, you will pay it off in 11 months and spend about $460 on interest. The best options, of course, are to pay your balance in full and on time each month or to not use a credit card at all and avoid going into debt altogether.
The minimum payment is also important because it affects how your credit card payments are applied to your balance. Any payment you send in will usually be applied to your minimum payment first, then to either balances with higher APRs first or to balances with lower APRs first. It depends on the terms you agreed to when you applied for the card, which you can also find in your card’s terms and conditions.