What You Need to Know About Credit Card Minimum Payments

Did you know most credit cardholders carry a balance from month to month? According to a recent survey from CNBC, 55 percent of American adults who have credit cards have debt. About one-fifth (22 percent) of cardholders with a monthly balance carry between $101 and $500. And about one-third (32 percent) of cardholders carry a balance between $501 and $2,500.

Consumers carrying a balance have a few options: full payment, partial payment, minimum payment or no payment. Obviously, making no payment is the least desirable of these options. Doing so repeatedly will damage your credit score and send your account into delinquency.

What about minimum payments though?

Here’s what you should know about this option for repaying your credit card balance.

Minimum Payments: The Basics

Somewhere on your credit card statement you’ll see the words “Minimum Payment Due” and a dollar amount. This represents the lowest amount you can pay on a revolving account to avoid late fees and delinquency — it will usually be a small percentage of your total balance (like one to three percent) or a small fixed fee (like $25).

It’s important to remember, however, that just because you can make minimum payments doesn’t mean you should. As NerdWallet cites one consumer protection expert saying, the ability to make minimum payments can be “really useful if people are a little short of income in a particular month” but “it’s not something that should be routine.”

Consequences of Paying Only the Minimum

While making minimum payments on your credit card balance will allow you to keep late fees at bay and avoid late payment status, it will do little to address any interest accumulating on the account. In fact, your minimum payment may barely cover the accumulated interest charges, which means you’re making little to no progress toward chipping away at your debts.

It’s easy to get trapped in a cycle of paying the minimum balance due. However, doing so can allow your balance to creep up or remain stagnant over time as interest keeps gathering. Case in point: It would take you about 16 months to pay off a $5,000 balance on a credit card with an 18.9 percent interest rate making only the minimum payments of $200 per month, according to Investopedia. The kicker is that you’ll end up paying $8,109 over the life of the balance due to interest. So, making only the minimum payments can lead to longer repayment timelines and greater interest charges than if you were able to pay off your balance more aggressively.

Escaping Debt Fueled by Minimum Payments

If you’re one of the many Americans who has found yourself stuck in the cycle of paying the minimum each month while your debt looms in the background, it’s helpful to take stock of your options.

If you’re struggling to keep making minimum payments on thousands of dollars in debt, you may find a debt settlement program like Freedom Debt Relief to be a viable solution. The goal here is for negotiators to reach an agreement on your behalf with your creditors wherein they accept a reduced sum in exchange for full payment of the amount agreed upon. While this will affect your credit score and require a commitment usually spanning a few years, many people have used settlement to wipe out large balances that’d otherwise take many more years — even decades — to pay off.

If you decide to tackle debt on your own, remember to always keep making minimum payments across your accounts, even while you’re targeting one account more aggressively. Paying off your high-interest accounts first will save you the most money over time, while paying off your smallest balances first can provide a psychological boost that helps you keep going until all your debts have been addressed. It can be tempting to make minimum payments, but you’ll pay more than the price for doing so habitually.

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About Dequiana Jackson

Dequiana Jackson, Founder of Inspired Marketing, Inc., helps overachieving women entrepreneurs conquer limiting beliefs and create marketing plans that win. This includes one-on-one marketing plan development, digital product creation, web design and content marketing. Dequiana is the author of Know Your Business: How to Attract Ideal Clients & Sell More and runs the award-winning blog, Entrepreneur-Resources.net.

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