Minimum payment

The minimum payment is the smallest amount a borrower can pay in a billing period to keep an account in good standing — avoiding late fees, default reporting, and additional interest penalties. On revolving credit (credit cards, lines of credit), the minimum is typically calculated as a percentage of the outstanding balance plus any interest charged that period.

How minimum payments are calculated

For credit cards, a minimum is commonly 2–4% of the outstanding balance, or a fixed dollar floor (e.g., $25), whichever is greater. For instalment loans, the minimum is the contractually scheduled payment for that month.

Example

A credit card has a balance of $5,000 at 22% APR with a 2.5% minimum payment rule. The minimum is $125. Of that, roughly $92 covers interest and $33 reduces principal. At that pace, paying only the minimum could take more than 25 years to clear the balance and cost more than $7,500 in interest.

Why the minimum payment trap matters

• Minimum payments are designed to maximise lender revenue — by keeping principal high, lenders earn interest for years
• Compounding works against the borrower — interest accrues on a slowly shrinking balance
• Consumer protections vary by jurisdiction — some markets require lenders to disclose how long the balance will take to repay at the minimum rate

Strategies to escape

• Pay more than the minimum every month — even small amounts above the minimum dramatically shorten the payoff
• Use the debt snowball or debt avalanche — both debt snowball and debt avalanche strategies prioritise paying more than the minimum on a chosen target debt
• Consider debt consolidation — at a lower rate, the same monthly outgoing clears the debt much faster

The minimum payment is a floor for staying out of default, not a target for getting out of debt.