What is the minimum monthly payment?

Definition and Examples of Minimum Monthly Payment

How Does Minimum Monthly Payment Work?

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Advantages and Disadvantages of Minimum Monthly Payment

Definition and Examples of Minimum Monthly Payment

A minimum monthly payment is the least amount allowed by a credit issuer to keep an account active. Making the minimum monthly payment on time helps keep the account free of late fees and high annual percentage rates (APRs). Additionally, making the minimum monthly payment on time each month helps build a good credit history. Learn more about what the minimum monthly payment is and how it fits into your financial life.

How Does Minimum Monthly Payment Work?

Consumers can find out the amount that will be charged as the minimum monthly payment in their cardholder agreements. It is usually a percentage of the balance plus interest charges. If there are late fees or outstanding amounts, these become part of the minimum payment as well. Interest is charged on the balance each month, which means you will pay compound interest. This happens when you carry a balance from one month to another. The minimum monthly payment may not reduce the principal amount quickly if you have a large balance. Therefore, many credit cardholders aim to pay off the balance or pay as much as possible above the minimum monthly payment.

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Credit card issuers must also include a “minimum monthly payment warning” in the monthly statements sent to consumers. Including the minimum monthly payment warning is a result of the Credit Card Accountability Responsibility and Disclosure Act of 2009, which enhances the disclosures required from credit issuers.

Advantages and Disadvantages of Minimum Monthly Payment

Although paying off the balance in full each month is optimal, it isn’t always possible. Here are some advantages and disadvantages to consider when making the minimum monthly payment:

Advantages:

• The minimum monthly payment helps build credit history.
• You will avoid late fees and high annual percentage rates by making the minimum monthly payment.
• The minimum monthly payment can help manage large expenses over time.
• The minimum monthly payment may be convenient when paying off other debts.

Disadvantages:

• You will pay more interest when making only the minimum monthly payment.
• It will take a very long time to pay off the amount charged on your credit card.
• Your credit score may be affected when your credit utilization rate is very high.
• The minimum monthly payment may give you a false impression of what you can afford financially.

Summary:

The minimum monthly payment is the lowest amount allowed by a credit issuer to keep your account active. While the minimum monthly payment can keep your account active, you will pay more interest compared to paying the balance in full. It will take a very long time to pay off the amount charged on your credit card if you only make the minimum monthly payment. Therefore, it is best to aim to pay off the balance in full or pay as much as possible above the minimum monthly payment.
Source: https://www.thebalancemoney.com/what-is-a-minimum-monthly-payment-5205401