Definition
A minimum payment is the smallest amount a lender requires you to pay each month to keep your account in good standing. On credit cards, it is typically 1–3% of your balance or a fixed dollar amount (often $25), whichever is greater. Paying only the minimum keeps you out of default but results in paying far more in interest and staying in debt for years longer than necessary.
Example
You have a $5,000 credit card balance at 20% APR with a 2% minimum payment. Your first minimum payment is $100. If you pay only minimums every month, it takes approximately 19 years to pay off the balance and you pay roughly $7,300 in interest — more than the original balance. Paying $250/month instead pays it off in about 25 months and costs approximately $1,133 in interest.
How It's Calculated
Minimum payment = max(balance × minimum %, fixed floor). Interest accrues monthly at APR/12. Each minimum payment covers that month's interest first; only the remainder reduces principal. This is why balances shrink so slowly on minimum-only payments.
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