What Happens To Your Balance And Credit Score When You Pay Only The Minimum On Your Credit Card? (2024)

When money is tight, making just the minimum payments on your credit cards can be tempting. Unfortunately, many people fail to realize just how expensive this bad financial habit can be. According to the Consumer Finance Protection Bureau, Americans spend about $120 billion each year on credit card interest and fees, which comes out to an annual cost of roughly $1,000 per household.

Even though minimum credit card payments may sometimes seem helpful, they’re almost always a mistake in the long run. Making minimum payments can snowball into a big problem—potentially hurting both your credit score and your wallet.

What Credit Card Payment Options Are Available?

Before we dive into how paying the minimum due on a credit card can affect you in terms of interest costs and your credit score, it helps to understand the payment options your card issuer will give you. When you receive your credit card statement in the mail or your email inbox, you can generally opt to pay one of the following:

• The minimum payment: Your minimum payment is the amount you need to pay to keep your account in good standing with your card issuer. Credit card companies calculate minimum payments using different methods. For example, the minimum payment on your account might be either 2% of your credit card balance or some other preset amount (i.e., $35, $25, etc.)—whichever is greater. If your balance is less than the card issuer’s preset payment amount, you’ll need to pay the entire balance that month. Check your credit card agreement or call the number on the back of your card to learn how minimum payments are calculated on your account.
• Statement balance: Your statement balance is the amount you owe when your billing cycle closes. This amount changes just once a month. It’s the sum of your previous unpaid balance (if applicable) plus any new charges, fees and interest incurred since your last credit card statement. If you pay this amount by your due date, you can avoid interest charges on your account.
• Current account balance: Your current balance adjusts every time the amount you owe changes on your credit card. In other words, it’s a snapshot of your account balance at the current moment in time (minus pending purchases and credits). Paying this amount will result in a zero balance on your account, at least until the next charge or credit posts.
• Other amount: You can specify the specific amount you want to pay toward your credit card balance. The only catch is that you still need to pay at least the minimum due each month. Otherwise, you could face late fees and other negative consequences.

What Happens to Your Credit Card Balance When You Make the Minimum Payment?

Paying the minimum on a credit card isn’t all bad. For example, if you pay at least the payment by your due date, you’ll keep your account in good standing and avoid late fees. Late fees on credit cards can be as high as $30 for your first offense. With repeat late payments within six billing cycles, the Consumer Financial Protection Bureau explains that your card issuer may charge up to $41 for each occurrence.

Although you can avoid late fees by making the minimum payment, you won’t avoid interest charges. If you want to steer clear of credit card interest fees, you’ll need to pay the full statement balance due on your account. (Note: There’s an exception to this rule if you’re taking advantage of a 0% APR credit card offer).

The average credit card interest rate—for accounts assessed interest—is over 22%, according to the Federal Reserve. So, interest costs can add up more quickly than you may realize.

Here’s an example.

Imagine you owe $2,500 on a credit card with a 16% APR. Assuming your card issuer calculates minimum payments at 2% of your balance (and assuming you make no new charges on the account), you would have to pay $50 per month to keep your account current. If you opted to pay just the $50 due, it would take you almost 22 years and cost you around $6,500 to pay off the debt—$4,000 of that total amount paid would be interest.

Since 2009, it’s been much easier for credit card holders to discover the long term cost of making minimum payments. That’s when Congress passed the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009. The CARD Act forces consumer credit card issuers to include a minimum payment warning with each monthly credit card statement.

If you want to know how much paying the minimum on a personal credit card could cost you, all you need to do is consult your statement. Depending on the APR and balance on your credit card, your minimum payment warning might look something like the following.

What Happens to Your Credit Score When You Make the Minimum Payment?

From a financial perspective, it’s clear that consistently paying the minimum on credit cards is a bad idea. What you might not know is that sticking to the minimum payment plan each month might impact your credit scores too. This is because of the factors that make up your credit score.

Payment history matters most where your credit score is concerned. It’s worth 35% of your FICO Score. In this area, paying at least the minimum amount due each month can prevent late payment reporting and protect your credit score from damage.

Your credit score, however, is made up of more than just your payment history. Scoring models also consider other information on your credit report, such as the amounts you owe. Within this credit report category, factors like credit utilization (the way your credit card balances relate to your credit limits) plus other details influence a meaningful 30% of your FICO Score.

Credit utilization is the percentage of your credit card limit that’s in use, according to your credit reports. So, if your credit report shows you have a $2,500 balance on a credit card with a $5,000 limit, your credit utilization ratio on that card is 50%. When your credit card utilization climbs, your credit score tends to move in the opposite direction.

Minimum payments themselves may not affect your credit score. But paying the minimum due on credit cards can lead to utilization problems. An increasing credit utilization is even more likely if you continue to use your credit cards for additional charges without paying off your balance (or at least paying as much as possible) when your bill comes due each month.

With interest charges, your minimum payment warning clearly shows you the financial consequences of making only minimum payments. But calculating the effect on a credit score isn’t as simple. It’s tougher to quantify the exact credit score impact of minimum payments because rising utilization rates will affect the scores of different consumers in different ways.

You can’t, for example, say that maxing out your credit cards and paying just the minimum due will lower your score by a specific number of points. That’s not how credit scoring works. You might personally see a credit score decrease of 30 points in this scenario. The next person might experience a credit score drop of over 100 points for the same action.

Yet one fact is certain: Credit scoring models reward you when you manage your credit cards responsibly and keep your utilization ratio low. Making minimum payments will almost certainly not help you here as much as paying off your balance in full—or as much as possible—would.

Bottom Line

Your best bet is to never spend more on a credit card than you can afford to pay off by your next statement. But, if you’re already over your head with credit card debt, you do have options. For example, you might consider consolidating your debt with a personal loan or a balance transfer credit card offer. If you’re in a serious financial bind, it might benefit you to speak with a credit counselor about your options as well.

Whatever you do, don’t fall into the trap of paying only what you have to on your credit cards month after month. Using your credit card for everything can also be dangerous, depending on how well you budget and track your spending.

One fact is certain—the sooner you start chipping away at your outstanding balances, the more money you stand to save. Plus, as you reduce your credit utilization bit by bit, your credit score may begin to rebound as well.