Minimum payment: What it is, and when to pay more

The minimum payment is the lowest amount you can pay on your credit card every month to keep your account in good standing.

Making at least the minimum payment on your credit cards every billing cycle ensures that you do not get stuck with late fees, penalty APRs or derogatory marks on your credit report.

You can easily find your minimum payment amount by looking at your most recent statement, where it will be listed. Your statement will also show how long it will take to pay off the debt and the total interest you’ll pay if you only make the minimum payment.

However, you should pay more than the minimum whenever possible. Paying more saves you money, helps you pay down your debt faster and lowers your credit utilization ratio — all of which are good for your credit score and your overall financial health. Plus, it shows lenders you are committed to reducing your debt.

Here’s what you should know about minimum payments, including how they affect your credit and how you can get into the habit of paying more.

How is your minimum payment calculated?

A minimum payment is typically a small percentage of your balance (usually 1 percent), plus any applicable interest charges and fees, or a flat percentage of your balance, which could be 2 percent to 4 percent.

When to pay more than the minimum

If you have credit card debt, you should always make more than the minimum payment. There are a number of reasons why:

• It can help reduce your balance sooner and lead to lower payments over time.
• It can help limit the interest you’ll owe.
• It keeps your credit utilization ratio low.
• It demonstrates to lenders that you are committed to reducing your debt.

The best way to ensure you can pay more than the minimum each month is to create a budget. Be aware of how much you typically spend on your card and adjust it based on your income and other expenses.

If you’re carrying a large balance and paying high interest charges, consider signing up for a balance transfer card with a 0 percent APR promotional period. That can help you pay down the balance with no interest charges for up to 21 months, if you qualify.

How paying the minimum affects your credit score

Paying your credit card bill on time and in full every month is the best way to maintain good credit. After all, payment history and credit utilization are the two most important factors in your credit score.

Making minimum payments on your credit cards could cost you a lot in interest charges and leave you with a high credit utilization ratio. This calculation refers to how much of your available credit you’re using. If you carry a balance month to month and consistently spend with your card, while only paying the minimum amount, your utilization will spike and it will lower your score.

On the flip side, paying more than the minimum helps you save money, pay off your credit card balances faster and maintain a high credit score.

How to lower your credit card minimum payment

There are a few things you can do to lower your credit card minimum payment, and each method can have different benefits.

• Pay down your credit card balance. This can help reduce your credit card minimum payment, and it can also help you pay off your debt faster and potentially save you money.
• Ask your issuer for a lower APR. While it’s best to focus on lowering your balance, you can also request an APR reduction. There’s no guarantee that your issuer will say yes, but it’s worth a shot if you can’t pay your balance off in full.
• Seek the help of a non-profit debt management agency. If you have damaged credit and your issuer won’t negotiate a lower payment or interest rate, non-profit debt management can help you reduce your interest rates (typically under 10 percent) and slightly reduce your monthly payment.

No matter which path you choose, be sure to keep making at least the minimum payment on all of your open credit accounts.

Bottom line

Paying at least the minimum payment on your credit cards every billing cycle is important to avoid late fees, penalty APRs and negative marks on your credit report. The minimum payment is usually a small percentage of your total balance, so paying more than the minimum can help reduce your balance sooner, limit the interest you’ll owe and improve your credit score over time.