A question we hear a lot is how much is a credit card’s minimum payment? For example, if you have a $2,000 balance on a card, what will the minimum payment be for that card? The short answer is that for most cards, the minimum payment is generally about 4% of the outstanding balance. As a result, for every $1,000 outstanding on a credit card, the minimum payment would be about $40.
Until a few years ago, most cards set the minimum payment at about 2% to 2.5%. At this level, making just the required payment would cover the interest charges and a very small portion of the outstanding balance. At this rate, it would take years to pay off a balance.
In 2005, banking regulators encouraged credit card companies to set minimum payments at a level where consumers would pay down their balances by at least 1%. The result was that most credit card companies moved to the current 4% minimum payment formula.
Don’t confuse minimum payment with balance owed
Keep in mind that the minimum payment and total balance owed are different. The minimum payment is simply the amount that must be paid that month to keep your credit card account current. In contrast, the balance owed is the total owed on the card, which can be substantially higher than the minimum payment.
Should you pay more than the minimum?
Because credit cards tend to charge high interest rates, paying down the balance as quickly as possible is generally the best approach. Of course, it’s important to weigh paying down a card with other financial obligations you may have. But the minimum payment should not be viewed as anything more than the absolute minimum that needs to be paid to satisfy your contractual obligation to the credit card company.