minimum payment
The smallest amount required by a lender each billing cycle to keep an account in good standing, typically a small percentage of the outstanding balance.
Example
“Paying only the minimum payment on a $5,000 credit card balance at 20% APR could take over 20 years to pay off.”
Memory Tip
MINIMUM payment = the least you can pay — but paying just the minimum costs you years.
Why It Matters
Understanding minimum payments is crucial because paying only the minimum each month means you will pay significantly more in interest over time and take much longer to eliminate your debt. Making only minimum payments can keep you trapped in a cycle of debt for years, affecting your financial freedom and ability to save for other goals.
Common Misconception
Many people believe that making the minimum payment each month is a responsible way to manage credit and will not harm their credit score. In reality, while minimum payments keep your account current, they result in paying thousands of dollars in extra interest and prolonging your debt burden unnecessarily.
In Practice
Suppose you have a credit card balance of 5000 dollars with a 20 percent annual interest rate and a minimum payment of 2 percent of your balance. Your first minimum payment would be 100 dollars, but only about 8 dollars would reduce your actual debt while 92 dollars covers interest. If you only make minimum payments, it could take over 30 years to pay off this debt and cost you more than 8000 dollars in total interest charges.
Etymology
From Latin 'minimus' (smallest) — the SMALLEST acceptable payment.
Common Misspellings
Check your credit score free — no impact
Related Terms
More in credit
Other credit terms you should know
See Also
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