Do you get charged interest if you pay minimum

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3. What Happens When You Pay the Minimum on Your Credit Card?

Making only a credit card’s minimum payment can greatly extend the time it takes to pay a balance, and drive up interest costs. But it can make sense—occasionally.

By Tony Azzara | American Express Credit Intel Freelance Contributor

5 Min Read | May 11, 2020 in Cards

At-A-Glance

Most credit cards will give you the option to make a minimum payment each month, but paying the minimum isn’t always a good idea.

Paying only the minimum can greatly increase how long it takes to pay off your credit card balance, and how much interest you’re charged.

If possible, it’s always best to pay your statement balance in full.

What Is a Credit Card Minimum Payment? 

The minimum payment option on your credit card statement is the lowest amount of money that you are required to pay on your credit card each month. But paying only the minimum may endanger your financial health. You can always pay more, up to the full balance – and experts say you should. It’s usually best to consider credit card minimum payments as only for financial emergencies, as described below in the section “When Might Minimum Payments Be a Good Idea?”

How is a Credit Card Minimum Payment Calculated?

Different card issuers calculate minimum payments slightly differently, but it’s generally between 1-to-3% of your statement balance or a standard minimum, whichever is more. For example, one of my cards charges 1% of the statement balance but not less than $35 unless the full balance is less than that, in which case the minimum payment would be the full balance. If I carry a balance from one month to the next, the minimum payment is calculated slightly differently: it’s 1% of my balance plus any interest that was charged in the previous month.1 For more on how credit card interest is calculated, read “How to Calculate Interest Rates."

Now you can see why experts recommend against credit card minimum payments. How could only paying 1% of your balance do anything other than greatly extend the time it takes to pay off your bill?

How Long Does it Take to Pay Off a Credit Card with Only Minimum Payments?

Thanks to the Credit Card Accountability, Responsibility And Disclosure Act Of 2009 (the CARD Act), your credit card monthly statement should include a table, like the one pictured below, showing how long it would take you to pay off your balance if you paid only the minimum payment.2 The CARD Act requires credit card issuers to compare the minimum payment with the payment needed each month to pay off the same balance in three years. They must also include the total cost of repaying the balance in both situations. The accompanying Minimum Payment Warning and table came from a statement with a balance slightly over $4,000.

Minimum Payment Warning: If you make only the minimum payment each period, you will pay more in interest and it will take you longer to pay off your balance. For example:

When Might Minimum Payments Be a Good Idea?

Despite the potential costs, there still are times when taking advantage of credit card minimum payments can be a good idea. Consider these situations: 

• Cash flow issues: For example, if you lose your job or experience unexpected medical, car, house, etc. expenses.
• Upcoming large expense: If you expect to need cash for a planned expense, it may take priority over your credit card payment even though it’ll cost you interest charges.
• 0% APR promotional offer: If your credit card has a 0% introductory APR, then that means no interest is added to your minimum payment during the promotional period. But take care, you usually must pay the entire balance before the end of the promotional period or you’ll pay interest – sometimes for the entire time.

During such financial emergencies you may be able to pay the minimum with a clear conscience. But it’s a good idea to do the math to figure out how much this approach will really cost you in interest charges.

Does Making the Minimum Payment Affect Your Credit Score?

Making payments on time is the most important factor in credit scores, according to the Experian credit bureau.3 For payments to qualify as “on time” you have to pay at least the minimum payment by the due date. You don’t get any extra credit score points for paying more than the minimum, and neither is your score penalized if you pay only the minimum.

However, as Experian points out, the second most important factor in your credit score is credit utilization: the portion of your credit limit that your balance uses up. By paying more than your minimum, you might improve your credit score by lowering your balance enough to keep your utilization at or below 30%, the level credit bureaus consider good. For example, if I have a $10,000 credit limit, a balance of $3,000 would represent a 30% credit utilization. Above that, despite the wide margin of credit left on my line, my credit score would likely get dinged.

Is it Better to Pay Off Your Credit Card or Keep a Balance?

IIf you can afford to pay your credit card balance in full and on time every month, there’s no downside. The belief some people have that carrying a balance is necessary to improve your credit score is wrong. Carrying a balance will not improve your credit score. It can decrease your score, in fact, if it leads to higher credit utilization – above 30%. Credit bureaus do give points for borrowing in the form of a secured or unsecured loan, as long as you then pay it back on time every month, and so some people apply that thinking to credit card debt. But loans and credit cards are very different ways to borrow money. But loans and credit cards are very different ways to borrow money.

The Takeaway

Paying only your credit card’s minimum payment isn’t usually a good idea, unless there are extenuating circumstances. Minimum payments are best considered a last resort for when times get tough.

Tony Azzara is a business technology writer and researcher based in Queens, NY, whose work focuses primarily on financial services technology.

All Credit Intel content is written by freelance authors and commissioned and paid for by American Express. 

The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.

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