What Does Minimum Monthly Payment Mean on a Credit Card

If you want to be responsible in how you make monthly payments on your credit cards in order to build a strong credit rating and credit score, understanding the effects of paying only the minimum payment due on your cards each month is very important.

Definition of minimum payment

The minimum monthly payment on a credit card is the lowest payment the credit card company will accept toward your balance each month and is calculated based on a specific percentage of your balance as detailed in the terms and conditions section of your account information.

After getting a push from the Federal government, many credit card companies raised their minimum monthly payments from two to five percent just a few years ago. Although it may seem that this may have created a hardship for some cardholders, in the long run paying more toward their credit card balances each month was probably a helpful development for people in debt, requiring them to pay off their card balances within a more reasonable time frame.

Problems with making only minimum monthly payments

By making only the minimum payment toward your credit card balance, especially if you have several cards with high balances, you’ll end up paying an exorbitant amount of interest before you’re able to pay off your credit debt. Many people make minimum payments to their accounts for years on end and barely make a dent in the balance owed on the account.

Of course, there are times when paying the monthly minimum on a credit card can be a convenient temporary means to achieve an end. Consumers who are “cash poor” and may not be able to make higher monthly payments at any given time can still keep a perfect payment history on their account by paying the minimum which will result in higher credit scores.

Making more than the minimum monthly payment

By making a concerted effort to pay more than the minimum payment due on your credit cards every month, you’ll be able to pay down your balances much more quickly, saving you money in interest. And since lenders look at the percentage of credit you have used for purchases in relation to your credit limit (generally you want to keep your balances at less than 50 percent of your card’s limit to attain a higher credit score), paying as much as possible each month above the minimum payment due can improve your credit rating much faster than perpetually paying only the minimum on your account.