How Minimum Payments Affect Debt Repayment

Minimum monthly payments are formulated to keep consumers paying interest for as long as possible. Understanding how minimums are constructed explains why adding extra payments is vital.

Minimum Payment Formulation

Creditors typically calculate your minimum monthly payment using one of two formulas:

• Flat Percentage: 2% to 3% of your outstanding balance.
• Interest + Fees + 1%: The interest accrued during the month plus any fees, plus exactly 1% of the principal balance.

As your balance decreases, the minimum payment requirement drops, extending the payoff timeline. This is why you must maintain a fixed monthly repayment budget rather than decreasing payments as balances fall.