Find out what a minimum payment is, how it’s calculated and how it affects your debt — in about a minute.
1. What is a minimum payment? It’s pretty much what it sounds like: the smallest amount you can pay each month on your debt without incurring a late fee. Late fees are never good.
2. How is your minimum payment calculated? In fancy terms, it’s usually either a percentage of your total current balance, or all of the interest you owe, plus 1 percent of the principal. Issuers also set a floor for minimum payments — a fixed dollar amount that the minimum payment won’t fall below.
Confusing, I know. The important thing is, the lower your balance, the lower your minimum payment.
3. Know that paying only the minimum will cost you over time. You might not incur late fees, but you will incur interest. And the longer you take to pay off the debt, the more interest you pay. Thanks to compounding interest, you will end up paying down your debt for a long, long time if you only pay the minimum.
Minimum payments? Simple enough. But the more you know about them, the better you’ll be at tackling that debt.
See related: How paying more than the minimum helps build credit, Basics of minimum payments, If you must pay less than the minimum, call and explain