What is a Minimum Payment?

A minimum payment is the minimum amount due on a bill. Most classically, minimum payments are used on credit card bills, although other types of bills may also allow people to make a minimum payment and carry a balance over. There is usually no penalty for making payments over the minimum, and in fact people are often encouraged to do this, but failure to make the minimum payment can result in serious consequences.

Typically, minimum payments are calculated as a percentage of the overall balance. The payment is usually high enough to cover the interest and a portion of the principal. In the case of a loan with terms, such as a car loan, the minimum payments are calculated to ensure that the loan is paid off within the term of the loan. Credit cards and other types of revolving credit accounts have minimum payments which are designed to keep the account in good standing, but not necessarily to pay the account off within a set period of time, because people can always add to the balance by making new purchases.

While it is theoretically possible for someone to pay off an account such as a credit card by making the minimum payment every month, it can take a long time, and the consumer may pay a lot of interest in the process. For this reason, many credit counselors and finance consultants recommend paying more than the minimum every month. This will pay down balances more quickly, and it also reflects on a consumer's credit score: people who routinely pay over the minimum will have a better score.

The best way to treat the minimum payment on a credit card is an emergency backup. If someone is in dire financial straits which will make it hard to pay the bills, it is appropriate to pay the minimum, as this keeps the account in good standing. Otherwise, carrying a balance can hurt someone's credit. People who routinely pay the minimum and carry a high balance may also find that their interest rates are raised, and that other terms of the card are changed.

With some loans, when someone overpays the minimum, the minimum payment in the next month will be correspondingly reduced, or the payments at the end of the loan will be made smaller. Paying over the minimum can help people cut down the amount of interest they pay over the life of the loan, and it will also shorten the terms of the loan. However, this is not always the case. This never happens with credit cards, for example, and in the case of some types of loans, borrowers may actually be penalized for overpayment. It is important to read the terms of a loan fully to understand these details.