Minimum Payments Explained: Why They Keep You in Debt

If you’ve ever looked at your credit card statement and wondered why the minimum payment seems so low, there’s a reason — and it’s not because your card company is being generous.

How Minimum Payments Are Calculated

Most credit card companies calculate your minimum payment as either:

• A percentage of your balance (typically 1-3%), or
• A fixed dollar amount (usually $25-35), whichever is higher

For example, on a $5,000 balance with a 2% minimum: $5,000 x 0.02 = $100/month

That sounds manageable — until you see how long it takes to pay off.

The Minimum Payment Trap

Here’s what happens if you pay only the minimum on a $5,000 credit card at 20% APR:

Scenario	Monthly Payment	Time to Payoff	Total Interest
Minimum only	~$100 (declining)	28+ years	$8,000+
$150/month	$150 fixed	4 years	$2,100
$250/month	$250 fixed	2 years	$1,000

Read that first row again. Paying only minimums on a $5,000 balance could cost you $8,000 in interest and take nearly three decades. You’d pay back more than double what you borrowed.

Why Minimums Are Set So Low

Credit card companies make money from interest. The longer you carry a balance, the more interest you pay them. A low minimum payment:

• Keeps you paying for as long as possible
• Maximizes the total interest they collect
• Feels affordable, so you’re less likely to pay it off aggressively

This isn’t a conspiracy — it’s the business model. Understanding it puts you back in the driver’s seat.

What Happens When You Pay More

Even a small increase above the minimum makes a dramatic difference. On that $5,000 balance:

• $50 extra/month saves you $4,000+ in interest and 15+ years
• $100 extra/month saves you $5,500+ and 20+ years
• $200 extra/month pays it off in under 2 years

The math is clear: every extra dollar you put toward debt accelerates your payoff exponentially.

What You Can Do Right Now

1. Check your statements. Look at the minimum payment disclosure — it shows how long payoff takes at minimum vs. a higher amount
2. Pick a fixed payment amount. Even $25-50 above the minimum helps
3. Use a calculator. Run your debts through our snowball calculator or avalanche calculator to see the impact
4. Automate the higher payment. Set it and forget it so you don’t slip back to minimums

The Bottom Line

Minimum payments are designed to work for the lender, not for you. The good news is that you don’t have to play by those rules. Any amount above the minimum changes the math in your favor — and the sooner you start, the more you save.

You have more power here than you might think.