Minimum Payment

Minimum payment summary:

• A minimum payment is the lowest amount you can pay toward a debt each month to keep your account in good standing.

• Credit card minimum payments are typically calculated as a percentage of the balance or a flat fee. 

• It takes longer to pay off a credit card debt and costs more in interest if you only make the minimum payment. 

Minimum payment definition and meaning

When you borrow money, you're expected to pay it back. The lowest amount you're required to pay each month is the minimum payment. You could pay more than the minimum, but you have to pay at least the minimum to avoid late fees and other consequences. 

Loans, credit cards, and lines of credit can all have minimum payment requirements. Lenders decide how to calculate your minimum payment due and the latest date you can make the payment to stay current. 

Key concept: The minimum payment is the amount you must pay to debts monthly to avoid late fees and other penalties.

More on minimum payment

You want to stay on top of your finances, and if you have debt, that means knowing how your payments are calculated. When you get a loan or credit card statement in the mail, a minimum payment amount will be listed. What does that mean? 

In simple terms, a minimum payment is the lowest amount you have to pay to a debt each month to keep your account in good standing. Minimum payments help you avoid late fees and other penalties. 

You could pay more than the minimum (and that's a good thing) but you always have to pay at least the minimum due. 

Minimum payment: a comprehensive breakdown

When you get a loan, line of credit, or credit card, the lender expects you to pay back what you borrow. That means you'll need to make minimum payments each month until the debt is paid off. 

With loans, the lender gives you what's called an amortization schedule. This schedule shows all the monthly payments you'll have to make to pay off the principal (the first amount you borrowed) and the interest. 

Credit cards tell you what your minimum payment is when you get your statement. Your minimum payment may be higher or lower from one statement period to the next.

How minimum payments are calculated

Lenders decide how to calculate minimum payments for debts. Here's how the math typically works for loans and credit cards. 

• Loans. Your lender looks at how much you borrowed, the interest rate, and the repayment term to calculate your minimum payments. If your loan has a fixed interest rate, which means it never changes, your minimum payment due should be the same from the first month of the loan term to the last. 

• Credit cards. Credit card debt

  minimum payments are a little different, since your balance could go up or down as you make new purchases and pay them off. It's more common for credit card companies to calculate your minimum payment as a percentage of what you owe each billing cycle. They may charge a flat fee instead if your balance is below a certain amount. 

Your loan or credit agreement should tell you how your minimum payments are calculated. If you're not sure how to decode your agreement or your statements, it's best to contact your creditor directly to ask how it works. 

What happens if you don't make the minimum payment on a loan or credit card? Your lender or credit card company could report a late payment to the credit bureaus if you fail to pay. They can also add late fees to your balance. 

If you miss enough minimum payments, lenders can step up collection actions. Once a debt goes unpaid long enough, a creditor could try to sue you to get you to pay

Real-life example of a minimum payment

You don't have to pay more than the minimum payment, but there's a great reason to do so: Paying more could save you money on interest. 

Assume you owe $5,000 on a credit card with an 18% annual percentage rate (APR)

• Total months to pay off: 47

• Total interest paid: $1,983

What if you double your monthly payments to $300 (and you don’t increase the balance)?

• Total months to pay off: 20

• Total interest paid: $797

You'll clear the debt in less than half the time and pay far less interest, for a savings of $1,186.

Tip: Your credit card statement should include a section that shows you how long it'll take you to pay off your balance if you only pay the minimum. That's required by the 2009 CARD Act.