Credit Card Minimum Payments: How They Work
Highlights from this article:
Minimum payments keep accounts in good standing but do little to reduce overall debt.
Minimum payments are typically a fixed amount or a percentage of your balance.
Paying more than the minimum reduces interest and helps pay off debt faster.
A credit card's minimum payment is the smallest amount of money you can pay each month to keep the account in good standing. You’re contractually obligated to pay this minimum, and failing to do so may result in a late fee or penalty interest rate.
Making minimum payments is a valid survival strategy for conserving cash in an emergency. But paying only the lowest required amount doesn't actually reduce your debt, so it can spell trouble in the long run.
How credit card minimum payments are calculated
The minimum payment is either a fixed amount — often $10 — or a percentage of the balance, whichever is greater. For example, if you have a $2,000 credit card balance, and your minimum payment is 3% of that balance, you'd have to pay $60. Some credit card issuers may require a percentage plus any late fees and accrued interest.
You can learn more about how your card issuer calculates minimum payments in your cardholder agreement. You can find the agreement online when you log into your account. If you can't locate your agreement, call your card provider to request a paper or digital copy.
What happens if I only make the minimum payment?
Let’s say you owe $5,000 on a credit card with a 20% interest rate, and the minimum payment is a flat 3% of your overall balance (or $10, whichever is higher).
Here’s how two potential payment schedules would shake out, according to the Government of Canada credit card repayment calculator.
Minimum payment only
Total time to pay off balance | 20 years, 11 months |
|---|---|
Total interest paid | $5,991 |
Total paid | $10,991 |
Let’s see what happens when you pay more than the minimum payment.
$50 more than the minimum payment
Total time to pay off balance | 5 years, 3 months |
|---|---|
Total interest paid | $2,304 |
Total paid | $7,304 |
Finally, let’s see what happens when you pay a fixed amount each month, regardless of the minimum payment.
$250 fixed payment
Total time to pay off balance | 2 years, 1 months |
|---|---|
Total interest paid | $1,133 |
Total paid | $6,133 |
The bottom line: Paying more than the minimum balance makes your money is more effective, because your balance generates less interest and you’ll pay it off at a faster rate.
Credit card repayment calculator
Use our fixed payment calculator to find out how long it’ll take to clear your balance.
3 reasons why you should pay more than the minimum
1. You can pay off debt quicker
Credit card issuers tend to set minimum payment requirements at rock-bottom levels. Making these small payments on your credit card bill will let you avoid late fees, but you won’t make any real progress on paying down your balance. If you pay more than the minimum, you can significantly shorten the length of time it’ll take to pay off the balance in full.
Using the above example, if you owe $5,000 and only make the 3% minimum payment, it’ll take nearly 21 years to pay off the balance — and that’s assuming you don’t charge anything else. However, if you pay just $50 more than the minimum payment each month, it’ll be paid off in roughly five years.
2. You’ll end up paying a lot more interest
Even if you’re using a card with a lower-than-typical interest rate, your interest charges will grow — quickly — 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.
Again, using the above example, if you owe $5,000 and only pay the 3% minimum payment, you would incur $5,991 in interest over the 21 years it would take to pay off your credit card. If you paid an additional $50 monthly, you would accumulate only $2,304 in interest — less than half the amount of interest you'd accrue while making minimum payments.
3. Your credit score could suffer
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, high balances can drag it down. However, an overpaid credit card, one that has a negative balance will not have a negative impact on your credit score.
Low scores can make 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 history.
Whether you have one or multiple credit cards, it’s best to use less than 35% of your total combined credit limit. If you can use less, that’s even better.
If you feel squeezed for cash at the end of the month, try paying your credit card bill right after payday.
Best Credit Cards in Canada
Compare all different credit cards side-by-side and find out the best card that will meet your need with special perks and benefits
More tips to pay down your credit card bill faster
If you’re eager to pay off your credit card balance, and have the financial flexibility to explore other options, here are a few options to consider.
Make smaller payments more often. Credit card interest is based on the average daily balance of your card. Splitting your monthly payment into two bi-weekly payments will reduce your average daily balance and cut down on excess interest charges.
Set up autopay. Sometimes it’s helpful to set-it-and-forget-it. If possible, create an automatic payment of more than the minimum amount each month — the payment will be part of your monthly bills rather than something you have to do manually.
Switch to another card. Balance transfer cards often offer low or 0% introductory interest rates for a set period of time — typically six to 12 months. You won’t accrue any (or as much) interest during this period which means every payment you make will help reduce the principal balance.
Frequently asked questions
What is a credit card billing statement?
A credit card billing statement is a monthly statement of your account. Also known as credit card bills, statements are typically available in paper or electronic form. Each statement typically includes your total account balance, current available credit and the minimum payment amount. Billing statements also include a list of all transactions that have taken place during the billing period.
What is credit card autopay?
This feature allows you to set up credit card payments that will be automatically deducted from a linked bank account, such as a chequing account, on a set schedule. Most card providers are equipped to offer an autopay option. You can elect to pay the minimum or a set amount of your choice.
Sources
NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines.
- Government of Canada. Image of the Credit Card Payment Calculator Tool Credit Card Payment Calculator. Accessed Dec 3, 2024.
DIVE EVEN DEEPER
Clay Jarvis