Is it okay to make just the minimum credit card payment?
Making credit card payments

For some people, making just the minimum payment on their credit cards is a way of life. It allows them to manage their cash flow, it keeps their account in good standing, and it may keep their credit score consistent. But while you may see these as positive things, making the minimum payment won’t help you reduce your debt, which could affect you significantly in the long term.

The best way to manage your credit cards is to always pay off your full balance every month. However, if you’re facing a financial emergency, you shouldn’t feel guilty about making the minimum payment for a few months. You just need to understand what the consequences are if you stick to this strategy.

What is the minimum payment for credit cards?

First off, you need to understand how minimum payments work. Generally speaking, credit card providers calculate the minimum payment based on a fixed amount or a percentage. In most cases, that would be $10 or 3% of your balance (whichever is higher).

Let’s say you had a balance of $5,000 and the minimum payment is 3%. That means you would be required to pay at least $150 whenever your bill is due.

Some credit cards use a slightly different formula to calculate their minimum payment requirement, but it doesn’t benefit you either way.

Why do people only make the minimum payment?

Some readers are likely already wondering why anyone would only make the minimum payment, but everyone has different circumstances, so it’s unfair to judge. One of the most common reasons I hear is that people just didn’t understand how credit card interest works. They thought making the minimum payment, plus a little more, was good enough.

Keep in mind that making the minimum payment is sometimes painted positively since it helps you with the following:

  • No additional late fees
  • Your account remains in good standing
  • Your interest rate stays the same because you haven’t missed a payment
  • You get access to all your credit card benefits
  • Your credit score might remain consistent

All of the above points are true, but the amount you pay in interest charges is insane. It may also put you in a debt trap, which can be challenging to get out of.

Making the minimum payment will take you years to pay off

Credit card statements show how many years it’ll take you to pay off your balance when making just the minimum payment, but many people don’t even look at it. Once you actually start paying attention, you’ll be shocked at how long it takes.

Let’s say you’re currently carrying a balance of $5,000 on a credit card with an interest rate of 19.99%. Your monthly minimum payment will be $150, but it’ll take almost 21 years to pay off. That’s right, it would take more than two decades before that debt would be wiped clean. You would have also paid $5,983.91 during that time. Insane, right?

Now let’s say you paid the minimum payments, plus $100 every month. It would take just over 3 years to pay off your balance. You’d still pay close to $1,500 in interest, but that’s significantly less than going the minimum payment route.

It could affect your credit score

As long as you make the minimum payment, your credit card provider won’t report you to the credit bureaus. As far as they’re concerned, you’re making your payments in order for your credit score to go up.

However, by doing this, you’re maintaining a credit card balance, which would increase your credit utilization ratio. Since this ratio is a significant factor when determining your credit score, you could actually be harming yourself.

Generally speaking, keeping a credit utilization ratio under 30% is ideal. That means if you have $10,000 in total credit available to you, you shouldn’t maintain a balance of over $3,000.

Every dollar you put towards your debt will decrease your utilization ratio, which is why you should always strive to pay off your full balance.

What if you can’t afford more than the minimum payment?

Many people would like to make more than the minimum payment, but they may not be able to due to their current financial standing. This is obviously frustrating because no one wants to spend decades paying off their debt. Fortunately, there are a few solutions that can help you.

Getting one of the best low interest credit cards in Canada is a good start. These cards typically have an interest rate of around 13%, which is 7% lower than the average interest rate of 20% that most credit cards charge. Many of these cards also come with a balance transfer option where you would pay 0%-4% interest for up to 10 months. If you take advantage of this offer, you could quickly pay down your debt.

Alternatively, you could check with your bank to see if you qualify for a line of credit. If approved, you’ll likely have a low interest rate so you could quickly pay off any outstanding debt. You would now only need to repay your line of credit. Keep in mind that your line of credit is money that’s available to you. If you’re not careful, you could end up spending it and having even more debt.

Final thoughts

It’s okay to make just the minimum payment on your credit card if you’re facing an emergency, but try to avoid it by all means possible. By doing this, you won’t pay any interest charges and avoid getting into a debt trap.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.

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