How Credit Card Minimum Payments Work

We are huge advocates for responsible personal finance habits and recognizing the power that credit products have when it comes to bettering our lives. That being said, credit products have a dark side, as many consumers can become trapped with endless payments, ballooning debt, and a feeling of being crushed.

Understanding the basics of how credit cards work, including the ins and outs of credit card statements and minimum payments, can go a long way in setting yourself up for financial success when it comes to using these tools for good.

Let’s get into all the details about how credit card minimum payments work and why you should always be paying more than the minimum payment.

What is a Credit Card Minimum Payment?

Once your credit card statement period closes, a statement that contains your balance due and the minimum payment is generated. The minimum payment is what must be paid to keep your credit card account in good standing.

Missing a minimum payment can incur late fees and negatively impact your credit report. Certain financial institutions may also raise your interest rate as a penalty for missing a minimum payment.

While minimum payments are an aspect of all credit cards, there is one exception, and that is for charge cards. Charge cards, which are only issued by American Express in Canada, do not have a minimum payment amount because the full balance must be paid in full after each statement.

Not all American Express cards are charge cards, but you’ll be able to recognize them as they don’t have a credit limit, and it will be stated in your cardholder agreement. If you want to learn more, check out our article on the main differences between charge cards and credit cards.

How Credit Card Minimum Payments are Calculated

Credit card minimum payments are calculated differently based on the credit card you hold, and will be outlined in the cardholder agreement which can be found on your credit card issuer’s website.

Most often, credit card minimum payments will either be a fixed amount, usually $10, or a percentage of the statement balance, whichever is greater. Some credit cards will have the minimum payment be only a percentage of the statement balance, such as 3%, so if you had a balance of $1,000, your minimum payment would be $30.

What Happens If I Make Only The Minimum Payment?

If you are only making the minimum payment on your credit card, it will take you forever to pay off your balance. That is not an exaggeration.

To illustrate, let’s look at a situation where a consumer has a balance of $500 on a credit card that has an interest rate of 20%, with a monthly minimum payment of $10. We will run two scenarios, which include making only the minimum payment of $10 and making a flat monthly payment of $100.

If only the $10 minimum payment is made monthly until the balance is paid off, it will take 9 years and 1 month to pay off the credit card. In that time period, you will have paid $584.01 in interest.

On the flip side, if a flat monthly payment of $100 is made until the balance is paid off, it will only take 6 months to pay off the credit card. In that time period, you will have paid $26.57 in interest.

While this situation is a relatively small credit card balance, it still takes more than 8 and a half years longer to pay off the balance if only paying the minimum payment monthly. That number alone showcases the importance of always paying more than the minimum payment, and optimally, the importance of paying as much as possible towards your credit card debt monthly.

If you want to do the math for yourself, the Government of Canada’s Credit Card Payment Calculator is an excellent tool worth exploring.

Why You Should Always Pay More Than The Minimum Payment

If you are practicing good personal financial habits, you should always be paying off your credit card in full every statement. Recognizing that everyone’s life situation is different, that might not be possible for you currently.

If that is the case, you should still always be paying more than the minimum payment to pay off your debt quicker. In fact, paying off credit card debt should be near the top of your priority list, as a result of the inflated interest rates. Credit card interest rates (formerly referred to as APR, or annual percentage rate) are brutal, and the interest will cause your balance to grow significantly, far quicker than you are paying it down if you are only making the minimum payment.

Making only the minimum payment will also cause your balance to continually increase, which will impact your credit utilization ratio. Credit utilization is one of the five aspects that compose a credit score, and it is calculated by your balance against your available credit across all of your credit cards. For example, if you have $10,000 in available credit with a $5,000 balance across all cards, your credit utilization ratio is 50%. A lower ratio makes for a better credit score in the long term.

If you are working on grinding your credit card balance down, consider looking into balance transfer credit cards. Cards like the MBNA True Line Mastercard can be an excellent personal finance tool, as they have welcome offers where cardholders can transfer existing balances onto the card and receive an interest rate of 0% for a period of time.

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MBNA True Line Mastercard

The MBNA True Line Mastercard offers a 0% promotional annual interest rate for 12 months on balance transfers completed within 90 days of account opening.

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Balance transfers are one of the best tips for someone who is looking to pay down their credit card balance and reset their personal finance situation, provided they can practice good financial habits and not accrue another balance once the card is paid off.

Conclusion

Understanding how minimum payments work and how they are calculated is a good start, but I hope the main takeaway from this article is that you should always be paying more than the minimum payment to build and maintain good financial health. After all, setting yourself up for success in the future should always be the goal when it comes to personal finance.

Frequently Asked Questions