One of the most attractive things about using a credit card is that you have the convenience of paying just a small amount of your balance each month until the balance is completely repaid. While this can make items more affordable at the time of purchase, it is easy to be tempted to purchase more than you can realistically pay for.
Minimum payments make it appear easier to afford something you normally couldn't. It typically costs much more in the long run than if you made payments in increments of more than the minimum required. There are many reasons to pay more than the minimum; avoiding compounding interest might be the top reason to do so.
Interest has a compounding effect, which can cause the balance to rise quickly. Higher credit scores depend on continuous low balances and timely payments keep your score up when you run a balance. Following these guidelines over time increases the confidence lenders have in you, which raises your score and your credit limit. This allows you to finance larger items, such as a vehicle or home.
When you make minimum payments, you ultimately pay more in interest chargesthan when you pay your balance with bigger payments. You could save hundreds, or even thousands of dollars in interest just by raising your monthly credit card payment.
For example, if you have a $2,000 balance, on a card with a 14% annual percentage rate (APR), paying the minimum of $43.33 a month will cost $1,833 in interest charges and take over 14 years to pay off. If you instead pay $100 a month and make no future charges, you'll only pay $291 in interest, saving more than $1,500 in interest.
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Pay off the Balance While Enjoying the Purchase
Making the minimum payment not only costs more money in the long run, but it will also take you longer to completely pay off your balance.
In the previous example, it would take more than 14 years to pay off a $2,000 credit card balance (at 14% APR) by making minimum payments. There are not many consumer items or services that last for 14 years. Suppose that $2,000 went towards a new television. If the television only lasted 10 years, you would still be paying it while looking for another one.
On the other hand, sending $100 a month consistently would allow you to pay the balance in just under two years. (Again, assuming you make no future charges on the card and your APR doesn't change).
Paying your balance sooner also positively affects your credit score, giving it a quick boost. This makes credit card companies feel comfortable giving you higher limits and lower rates.
While your monthly payment isn't factored into your credit score directly, it does play a role in the health of your credit. There are three major agencies that track a person's credit, each of which uses a different scoring system (Equifax, Experian, and Transunion). When your credit score is checked, one of these agencies is used—generally, your score is reduced slightly per credit check.
Credit utilization—the ratio of your credit card balance to your credit limit—is generally 30% of your credit score. If your credit card balance is high relative to your credit limit, it will lower your credit score. A lower credit score can make it harder to qualify for credit cards and loans.
Minimum payments only lower your balance a small amount at a time because a large amount of your payment is applied to monthly interest instead of your credit card balance. What this means for your credit score is your balance to limit ratio remains high for the time it takes you to pay it down.
So if you have high card utilization (how much you use your card), and make minimum payments, it will take several months or years to reduce your utilization ratio. Experian uses a credit utilization ratio to rate credit utilization.
Total Debt ÷ Total Available Credit = Utilization Rate
This is your total debt divided by your total available credit, expressed in a percentage. The higher your utilization rate is, the lower your score will be.
If you have $5500 in total debt, and your total available credit is $11,000, you have a 50% utilization rate. You should try to keep your ratio lower than 30%, which demonstrates credit responsibility to lenders.
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It Helps You Prepare for a Larger Loan.
If you plan to buy a home or make another large credit purchase in the near future, you might need to pay off existing debts to help you qualify for a loan or for a competitive interest rate.
Making minimum payments won't lower high credit card balances quickly enough to help you receive approval for a mortgage. Raise your payments to pay off credit card balances, and ensure your credit utilization ratio is lower before you make an application for a large loan.
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You'll Increase Your Available Credit, and Have an Emergency Source.
Available credit is the amount of credit extended to you by a credit card company. If your balance is slowly decreasing because you're only making minimum payments, it will be several months (or years) before you can use your credit cards again.
Increasing your monthly payment amount allows you to pay your balance down quickly so you can free up available credit. If you have used all of your available credit, you no longer have credit to use in case of an emergency.
If your car breaks down, and you don't have the funds to pay for the repairs, you won't be able to finance them, either. This can be a dangerous situation to be in—you might not be able to get to work, which decreases your ability to pay your debts.
Managing your credit can be difficult. If you can resist the temptation to purchase items you may not need, keep your balance low, and make timely payments you will be able to live with a comfortable level of debt. Emergencies may not be as stressful, and you can begin to plan for larger purchases to make your life more pleasant.
By making a larger monthly payment, more money goes toward the principal balance, which is what your interest is calculated on. Every dollar paid over the minimum reduces your original debt and the interest charged on that debt.
You won't be penalized for overpaying your credit card, but there are also no benefits for doing so. When you pay more than the balance due, your issuer should automatically issue the amount you're owed as a statement credit and your credit line will reflect a negative balance until you've spent the credit.
Why? Because when you carry a balance on your credit cards, your credit card issuer will charge interest on your debt—and when you only make the minimum payment on your credit cards, those interest charges can quickly add up.
If you can't pay your statement balance in full each month, Capital One suggests paying as much of the balance as possible. Paying even double the minimum amount can help significantly.
It's usually a percentage of the total outstanding balance or a fixed amount set by the credit card issuer. Paying only the minimum due allows cardholders to avoid late fees, but it results in carrying forward the remaining balance to the next billing cycle, incurring high-interest rates.
A minimum payment is the lowest amount you're allowed to pay towards your credit card debt in any given month. This is calculated based on your latest statement balance. If you can, always try to pay more than the minimum amount. Paying more than the minimum each month reduces the interest you'll pay.
Fortunately, overpaying your credit card won't hurt your credit score. You might know that carrying a balance on your credit card affects your credit utilization ratio — or how much of your credit line you're using. And if you're using more than 30%, your credit score can take a hit.
But assuming the overpayment isn't large enough to trigger any fraud alerts, there aren't any major downsides to an overpayment either. It won't affect your credit score and can be quickly resolved by requesting a refund from your card issuer or just letting the balance roll over.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
Does making only the minimum payment affect my credit? As long as you're paying your credit card minimum payment on time, it reflects positively on your payment history. But your credit scores may still be affected when you pay only the minimum each month, according to Sherry.
To pay credit card debt off more quickly you'll need to pay more than the minimum monthly payment. Aim to pay off as much as possible and reduce any other card spending. If possible switch to a credit card with a low or 0% interest rate offer on transferred balances. This way you can pay down the debt quicker.
If you pay the minimum balance on your credit card, it takes you much longer to pay off your bill. If you pay more than the minimum, you'll pay less in interest overall. Your card company is required to chart this out on your statement, so you can see how it applies to your bill.
Yes, you can keep your credit card active by paying just the Minimum Amount Due every month. But, you will have to pay high interest charges and also, there will be no interest free credit period. Just remember that the less you pay of the outstanding amount, you will be made to pay more in interest.
If you typically carry a balance on your credit card from one month to the next, then making multiple payments during each billing cycle can reduce your interest charges overall. That's because interest accrues based on your average daily balance during the billing period.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
The 30% answer finds backing from the credit bureau Experian: "The 30% level is not a target, but rather is a maximum limit. Exceeding that level will have significantly negative impact on credit scores," says Rod Griffin, Experian's senior director of public education and advocacy.
What you might not know is that sticking to the minimum payment plan each month might impact your credit scores too. This is because of the factors that make up your credit score. Payment history matters most where your credit score is concerned. It's worth 35% of your FICO Score.
To avoid credit damage from high credit utilization, you want to keep it under 30%. The lower the rate, the better for your credit — so striving for 0% is always the best approach. If you want to check your credit score and see how your card balances are affecting it, you can do so by using a credit monitoring service.
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