What Is a Minimum Monthly Payment?

A minimum monthly payment is the lowest payment allowed by a credit issuer to keep an account current. Paying the minimum monthly payment on time will keep an account free from late payment fees and penalty APRs. 

Making the minimum monthly payment on time each month also helps you build a good credit history. Learn more about what a minimum monthly payment is and how it fits into your financial life. 

Definition and Examples of a Minimum Monthly Payment

The amount of the minimum monthly payment due is the least amount of money you can pay a credit card issuer each month to avoid penalties. If this payment is not made on time, credit issuers can issue a late fee, increase the annual percentage rate (APR), and report delinquency on the account to the major credit bureaus. 

The minimum monthly payment is based on a calculation determined by the credit issuer. It is different for each credit issuer, but generally, the minimum monthly payment falls between 1% and 3% of the balance, or a set dollar amount if it is lower than this. 

For example, the credit issuer JPMorgan Chase Bank calculates the minimum monthly payment for its Chase Freedom card with these terms and conditions:

• $35 (or the total amount you owe if it’s less than $35)
• The sum of 1% of the new balance, the periodic interest charges, and late fees. 

If 1% of the total balance is less than $35, then the minimum monthly charge is $35. If the total balance is less than $35, the minimum monthly payment is the total amount owed. 

Here is an example of how a credit card user’s minimum payment can be calculated on a credit card statement using the above terms.

In this example, the account owner carried over a balance, resulting in interest charges of $36.95. These must be paid as part of the minimum payment. 

The other part of the minimum payment comes from calculating 1% of the balance ($2,866.92 x .01 = $28.66).

Then, $28.66 (1% of the balance) plus $36.95 (interest charges) equals $65.61, which the credit issuer rounded down to $65 for the minimum monthly payment.

How Does a Minimum Monthly Payment Work?

Consumers can learn how much they’ll be charged for the minimum monthly payment in their cardmember agreements. It’s typically a percentage of the balance plus interest charges. If there are late fees or overdue amounts, those become part of the minimum payment as well. 

Interest is charged on the balance every month, essentially compounding what you pay for finance charges. This happens when you carry a balance from month to month. Making just the minimum monthly payment may not lower the principal very fast if you carry a large balance. So, many credit cardholders aim to pay off the balance or pay as much as they can over the minimum monthly payment each month.

Once a minimum monthly payment amount is determined, the credit issuer sends you a statement with the appropriate disclosures needed for the monthly statement. When you make the minimum monthly payment, the credit issuer then reports the on-time and payments in full to the credit bureaus. That’s how your credit history is established. 

For not making the minimum monthly payment, consumers face penalties in three main areas:

• Late fees: When consumers do not make their minimum monthly payment on time, they are subject to late fees. These late fees must be paid as part of the next month’s billing cycle and minimum monthly payment. 
• Penalty APRs: When a payment is late, the credit issuer can increase the APR, resulting in higher interest charges. 
• Negative reporting to credit bureaus: If a minimum monthly payment is not made for two full billing cycles (or until the account is 60 days past due), the credit issuer will likely report delinquency to the major credit bureaus.

Notable Happenings

Credit card issuers are also required to include a “minimum payment warning” on the monthly billing statements sent to consumers. The inclusion of the minimum payment warning is a result of The Credit CARD Act of 2009, which enhanced the disclosures required of credit issuers.

The “minimum payment warning” disclosure shows consumers how much time it will take and how much interest they will pay if they only make the minimum monthly payment on their bills each month. 

The disclosure also includes an alternative payment that will result in paying off the amount in three years. 

For example, you might see something like this on a credit card statement with a $5,700 balance:

New Balance: $5,707.75

Minimum Payment Due: $118.00

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: 

In this scenario, the balance of $5,707 has a minimum payment of $118. In the “minimum payment warning” section, you learn that making only the minimum payment will result in 15 years of credit card debt totaling $11,945 in payments. 

However, the alternative payment of $201 will allow the borrower to eliminate the balance in three years. It will also allow the consumer to pay $7,234 in charges instead of $11,945. 

The disclosure plainly states that borrowers will take longer to pay off the balance and end up paying more in interest. 

Pros and Cons of Making a Minimum Payment

While paying off the balance in full each month is ideal, it’s not always possible. Here are some pros and cons to consider with making the minimum payment:

Pros Explained

Making the minimum payment helps build credit. Even though you won’t be paying down the balance, you will be building history with your credit issuers for all the on-time payments you’re making. The history of regular, on-time payments is a key component of your credit score. 

You’ll avoid late fees and penalty APRs by making the minimum payment. Making the minimum payment on time means you’ll also avoid late fees and penalty APRs. Adding late fees and a higher APR to your credit card terms of service will cost you more money. 

A minimum payment can help you pay for a large expense over time. If your car breaks down and you’re in a bind when it comes to money, you may need to put it on a credit card and pay for it over time. 

A minimum payment might make sense when you’re paying down other debt. There are instances where it may make sense to pay the minimum payment. If a consumer is working on paying down credit card debt, it can make sense to pay as much as possible on a credit card with a higher APR while only making the minimum payment on a card with a lower APR. 

Cons Explained

You will pay more in interest by only making the minimum payment. When you pay your credit card bill in full each month, you are not charged interest on the purchases you made that month. When you do not pay your bill in full each month, you’ll be charged interest on the unpaid balance. 

It will take substantially longer to pay off the amount charged to your credit card. Your credit issuer is required to include a disclosure on your credit card statement about the number of years it will take to pay off the balance if you’re only making the minimum monthly payment versus if you made more than the minimum monthly payment.

Your credit score may suffer when your credit utilization rate is too high. Your credit utilization rate is the amount of credit you’re using relative to the amount of credit available to you. When you only pay the minimum monthly payment, your balance will be much larger. If you continue to add to it while only paying the minimum payment, you’ll quickly exceed the ideal credit utilization ratio (which is generally considered less than 30%). In turn, your credit score will fall.

Paying only the minimum may give you a false sense of what you can afford. Lower monthly payments might entice you to charge more to your credit card.