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How minimum payments are applied to small balances

By Jane McNamara
Published: June 26, 2014

Let's Talk Credit
Let's Talk Credit columnist Jane E. McNamara
Jane E. McNamara is president and chief executive officer of GreenPath Debt Solutions, a nationwide, not-for-profit, providing financial literacy through consumer education and counseling for more than 50 years. For financial literacy tips and assistance visit GreenPath on Facebook or YouTube.
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Question for the CreditCards.com expert

Dear Let's Talk Credit,
I have an outstanding balance of $60 to be paid toward my credit card, but I can only pay the minimum amount due of $25. If I make this payment would the $25 be deducted from my principal loan amount or would I still owe the credit card $60 and the $25 is just for any interest? -- Suleman

Answer for the CreditCards.com expert

Dear Suleman,
Credit card issuers do not all set minimum payment requirements the same way. Many charge a minimum payment of $15 or $30; or 1 percent of the total balance (whichever is greater), plus interest charges and any fees.

With a balance of just $60, your payment will go toward the interest accrued, which is likely less than $1, and the rest will be applied to your balance. Your next statement will reflect your new balance of approximately $35.75. At that time, if you can still only afford to pay $25, it will take you an additional month to pay off the final balance of $10 or so. That is, of course, if you do not add any charges to the account.

When using credit cards, it is a good idea to have a plan in place to pay off balances in full or within 90 days. Doing so will save you money in interest charges, and will hopefully keep you from using credit to extend your income.

If you do, for some reason, increase your balance on this card and your minimum payment increases as a result, you must pay at least the minimum amount due each month. If you make a payment less than the minimum amount due, the card issuer will consider it a late payment and will likely charge you a late fee of $25. If you do not make at least the minimum payment due for 60 days or more, your card issuer may increase your interest rate to the default rate of 29 percent or more.

Let's keep talking!

See related: Feds cap late fees at $25

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