The minimum monthly payment is defined as the lowest amount of money a customer must pay on the revolving credit account to maintain good status with the credit card issuer. The least a customer should do to avoid late penalties and to have a positive payback record on their credit report is to make the minimum payment on time each month. The minimum monthly payment is determined as a small proportion of the overall credit balance owed by the consumer.

If a customer doesn't make the minimum monthly payment on time, the creditor has the right to increase the APR, charge a late fee, and report the account's delinquency to the main credit bureaus.

How Does Minimum Monthly Payment Work

Customers get a minimum monthly payment on their revolving accounts each month. Revolving credit accounts are different from non-revolving accounts. Customers get a lower minimum monthly payment from their revolving credit accounts compared to non-revolving credit accounts' conventional payment plans.

In all other respects, consumers who keep paying the minimum monthly payment due on their credit cards would pay more interest charges and take longer to repay their debts than those who pay more. The best action is always to make full and on-time payments on credit card balances to avoid incurring interest or late fees.

Customers can also earn rewards points and benefit from cash-back rewards on transactions when they pay off their revolving credit balances every month.

The credit issuer uses a formula to calculate the minimum monthly payment. The minimum monthly payment varies according to the creditor, but generally, it is between 1% and 3% of the remaining balance or a specific dollar amount if it is less.

Minimum Monthly Payment Example

For example, the creditor JPMorgan Chase Bank uses the following criteria to determine the minimum monthly payment of the Chase Freedom card:

• $35 (or your entire debt if it is less than $35)
• The sum of the periodic interest fees, late fees, and 1% of the new balance.

The minimum monthly payment is $35, even if 1% of the total sum is less than that amount. The minimum monthly payment is the total owed amount if the card balance is less than $35.

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Revolving Vs. Non-Revolving Credit

Revolving credit accounts allow a borrower to take out a maximum amount of money at a predetermined interest rate may be variable or fixed. Revolving credit accounts, which differ from non-revolving credit in that they are open accounts, permit borrowers to maintain fluctuating credit balances without using the total maximum principal.

As long as they maintain a strong reputation with the creditor, customers can keep their revolving credit accounts active indefinitely. Revolving credit accounts may have outstanding variable balances every month. Thus, credit providers send customers a monthly statement that summarises account activity and specifies the minimum monthly payment they must pay to maintain their accounts current and delinquent-free.

Revolving credit monthly statement gives the account holder various information. The basic information includes:

• The month's itemized transactions.
• Fees charged.
• Interest rates.
• The balance after the statement period.
• The previous month's balance.
• The minimum payment required to maintain the account's current status.

Benefits and Drawbacks of Minimum Month Payment

While making the minimum monthly payment is ideal, it's only sometimes possible. Consider the following benefits and drawbacks of making minimum monthly payments.

Minimum Monthly Payment Benefits

Making the bare minimum monthly payment promotes credit score building. Even though you won't be reducing the sum, all your on-time payments to your creditors will help you establish a track record with them.

You can avoid late penalties and penalty APRs by making the minimum monthly payment.

Over time, a minimum monthly payment may help you cover a significant expense. If your automobile breaks down and you're strapped for cash, you might have to charge it to a credit card and pay it off over time. When settling other debt, making the minimum amount could make sense.

Minimum Monthly Payment Drawbacks

You will accrue additional interest by merely making the bare minimum monthly payment. You won't be charged interest on the transactions you made that month if you pay off your credit card balance every month. The fee charged to your credit card will take much longer to be repaid.

When your credit use rate is too high, it could affect your credit score. Your credit utilization rate is the proportion of your credit use to your credit availability. Your balance will be significantly higher if you only make the minimum monthly payment. If you keep adding to it while making the minimum payment, you'll soon go over the recommended credit utilization ratio. Your credit score will consequently decline.

What Happen If you pay less than the minimum payment on your credit card

Paying less than the minimum monthly payment on your credit cards may negatively impact your credit score. A credit card payment less than the minimum monthly payment is considered a missed payment by credit card issuers, which can ruin your credit history and score.

The three main credit bureaus, Experian, Equifax, and TransUnion, will be informed if you don't pay the minimum monthly payment due on your credit card. A negative mark associated with the missing payment will appear on your credit history and might stay there for seven years.