EyeOnThe short answer
A payment can mostly cover interest and fees, leaving little to reduce what was borrowed. New spending can offset that reduction. The minimum is a required payment, not a promise of fast repayment.
What it means
The minimum is usually set as a percentage of the balance, a fixed amount, or interest plus a small share of the balance, whichever the agreement specifies. It keeps the account up to date, but it is not designed to clear the debt quickly.
Because most of a minimum payment can go towards that month's interest, the balance may fall very slowly.
How it works
Take a 2,000 balance at 24% APR where the minimum is the month's interest plus 1% of the balance. Interest is about 40 and 1% is 20, so the first minimum would be roughly 60. As the balance falls the minimum falls too, which stretches repayment over many years if you only ever pay the minimum.
Paying more than the minimum reduces the balance faster and reduces the total interest.
A simple example
On those example terms, only paying the minimum would take far longer to clear than paying a fixed 100 a month, and cost noticeably more in interest. You can see this by entering the figures in the minimum payment calculator. All numbers here are illustrations.
Things worth checking
- Missing a minimum payment can lead to fees, a higher rate and a late-payment entry on your credit report.
- Setting up an automatic payment for at least the minimum can help avoid accidental misses; check the date and your bank balance.
- Check whether new spending is added to the balance while you are repaying, because it extends the time to clear.
- Look for a statement line showing how long repayment would take at the minimum. Some countries require it.
How it varies by country
How minimums are calculated, and what must be shown on statements, differs by country and lender.