Making only the minimum payment on your credit card keeps your account in good standing and lets you avoid late fees, but that’s about all it does. It won’t get you very far toward reducing your credit card debt.
If you’re experiencing a financial emergency, paying only the minimum for a few months can be a way to conserve cash in the short term, so it would be wrong to say you should never do so under any circumstances. However, as a long-term strategy, only making the minimum payment is a recipe for serious trouble. Here’s why.
Credit card issuers tend to set minimum payment requirements at rock-bottom levels. You’ll generally owe either a fixed amount — often $10 — or a percentage of the balance, whichever is greater. Some cards require you to pay only 3% of the balance each month, plus any fees and accrued interest. Making these small payments on time will let you avoid late fees, but you won’t make any real progress on paying down your balance.
See how it affects you: Look at your credit card bill. Federal regulations require that it must include how long it would take you to pay off your balance if you pay only the minimum each month. You’ll significantly shorten that period just by paying more than the minimum, even if you can’t pay the full balance.
Unless you’re using a card with an ultra-low interest rate, your interest charges will grow along with your balance. Make only the minimum payment, and you’ll barely wipe out last month’s interest. And if you keep charging items to the card, you’ll fall further and further behind.
See how it affects you: To estimate your interest charges, divide your card’s annual interest rate (AIR) by 12 and multiply it by your average balance. If your card has a 21% AIR, for example, your monthly interest rate would be 1.75%, or 21% divided by 12. Multiply that by the balance you’re carrying. If you have a balance of $10,000 and you paid only the minimum, you’d owe about $175 in interest next month.
Paying more of your balance each month means you can start next month with less debt.
When your credit card balance climbs, so does your credit utilization ratio — the percentage of your credit you’re using. And because your credit utilization ratio is a major factor in your credit score (30% of it) high balances can badly damage your credit. That makes it harder to qualify for affordable loans and credit cards with the best terms. It can even affect your ability to find a job or rent an apartment, as employers and landlords commonly review applicants’ credit.
It’s best to use less than 35% of your credit limit on any given card. If you can use less, that’s even better.
See how it affects you: Use a credit utilization calculator to determine your ratio. If your debt is bumping up against your credit limit, focus on bringing down your balances as much as you can. If you feel squeezed for cash at the end of the month, try paying your credit card bill right after payday. Or if you’re able, volunteer for more shifts at work and put the extra cash toward your debt.
Paying the minimum is better than paying late or not at all, which will result in fees. And because late payments can also damage your credit score, paying at least the minimum is essential.
But you shouldn’t plan to just make minimum payments forever. If your debt totals more than half your annual income, you won’t be able to pay it off within five years, and it’s a source of major stress in your life, you should consult a Licensed Insolvency Trustee (LIT). A LIT will help you find ways to solve your financial problems, such as filing for bankruptcy.
But if you can find a way to pay more than the minimum, do it. Deal with your debt now instead of putting it off until later.
Claire is an assistant assigning editor at NerdWallet. She was a speaker at CardCon, a conference for those who cover credit cards and personal credit, in 2017 and 2018, and FinCon, a conference for those who cover personal finance, in 2019. Her work has been featured by Forbes, USA Today and The Associated Press. When she’s not writing about money, she enjoys running and playing Scrabble. Email: [email protected] Twitter: @ideclaire7.