Is Paying the Minimum a Good Idea?

Let’s say after a week out of eating and celebrating with friends, you bill up your credit card to $1000 balance. First thing you do is make sure you pay the minimum due on your next balance, maybe around $100. But is $100 all you should be paying? Paying the minimum makes sense, but paying more than the minimum makes more sense. 

It’s tempting to pay small increments on your balance, especially when you’re under financial stress. But if you can, avoid doing so. Instead, send the highest payment you can afford and reduce spending in other areas to focus on paying off the debt. When you make minimum payments, you ultimately pay more in interest charges over time than when you pay your balance with bigger payments. In the above scenario, by paying $200 or $300 increments, you could save hundreds of dollars in interest solely by raising your monthly credit card payment.

Credit card companies will sometimes offer promotional rates, with a reduced annual interest rate, sometimes as low as one or two percent, to incentivize paying off more than the minimum payment due on larger balances.  Depending on the interest rate, you’ll save an average of 10% to 29% per year in interest on any balance you pay off. Paying more than the minimum will also reduce your credit utilization ratio—the ratio of your credit card balances to credit limits.

When you only make a minimum payment, you’ll risk falling into debt even more. Card issuers are legally required to include a “minimum payment warning” on each billing statement according to the Credit CARD Act of 2009. The consequences of paying only the minimum are costly, more so than mustering up the most you can and deliberately saving until you have paid it all off, so pay off your balance in full each month to avoid high interest charges and debt.
Need tips for making more than your minimum payment? Create a budget and stick to it. Don’t add more debt to your credit card. The less debt you add, the quicker it will be to pay off your debt as the number you need to pay off will remain close to the same. If you have multiple balances you need to pay off, focus on paying down the credit cards you own that have the highest annual percentage rate (APR) first.