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While your credit card issuer may offer you the convenience of paying only a small percentage of your overall monthly balance, this practice should not become a habit for you. The amount of money you owe may affect your credit score significantly. So, does paying the minimum hurt credit score? Let’s find out.
An important part of evaluating your credit score is your payment history – accounting for 35% of your overall score. There’s no doubt then that your timely repayments (and the amount) matter a lot. Making a minimum payment against your credit card bill month after month may be tempting, but it can have serious consequences for your financial health. It can damage your credit score apart from leaving you in long-term debt.
Making bigger payments, on time, instead of minimum ones can help you get rid of your debt quicker and improve your credit score over time.
What is the minimum payment for credit cards?
This is the lowest amount a cardholder is required to pay against their statement balance in order to keep their payment history on the credit report positive. Basically, you’re paying just enough to keep your credit report in the clear.
However, if you’re paying only the lowest amount, you end up delaying the time it would take you to clear your credit card debt. Moreover, you pay considerably more interest on your debt.
Experts believe that paying the minimum is a viable idea only for a short while – that too if you’re actually dealing with financial troubles and cannot afford to pay in full. Since you’re not missing a payment, a minimum payment may not hurt your credit score immediately but it will get you into a deeper hole, leading to debt mismanagement.
It’s always a smart decision to pay off your balance quickly in order to save money and manage your budget better.
How do credit card companies calculate minimum payments?
The minimum monthly payment for credit cards is either a flat percentage of the total balance or is calculated by a formula.
While most credit unions and subprime lenders use a flat percentage (2% to 4% of the monthly bill, including charges and fees), big card issuers generally use a formula whereby they add up a percentage-based minimum payment and the interest as well as fees to the minimum balance due.
Keep in mind that each credit card issuer, financial institution, or bank has its own set of rules regarding minimum payments. These also depend on the type of credit card you have.
Here’s how some of the major credit card companies or banks go about calculating the minimum payment.
- Bank of America, Chase: 1% of the new balance or $35 plus past due amounts (whichever is higher) plus interest charges or late fees.
- Citi, Wells Fargo: 1% of the new balance or $25 plus interest and fees.
How to find the minimum payment against a credit card?
The minimum payment, as well as the due date and balance, will appear on your credit card statement. If you try to estimate the required amount yourself, you can wind up paying too little. So, it’s best to always double-check your statement or online bill for accuracy.
Does paying the minimum hurt credit score?
Timely monthly payments (even minimum payments) can help you maintain a good credit score. Additionally, it helps you avoid late fees and other penalties.
However, making minimum payments habitually can still harm your credit score as you may be seen as someone who is about to max out their credit limits. This can cause your credit utilization ratio (the amount of credit available vis à vis the amount of credit used) to go up. Since it accounts for 30% of your FICO score, you should aim to keep your credit card balance below your credit limit.
If your credit utilization ratio exceeds 30% of your credit card limits, it can lower your credit score.
Read more: Apartment credit check affects credit score
Should you pay the minimum or full balance?
It may be okay to make a minimum payment in rare situations when your budget is stretched thin and you want to keep your credit score from tanking or if your credit card has a short-term 0% APR or is a promotional interest-free credit card. But, a regular minimum payment is a matter of concern. It’s always a good idea to pay off your card bill in full as it would reduce the interest paid and will speed up the repayment process.
Ways to avoid the minimum payment trap
It’s easy to fall into the habit of paying the bare minimum. However, doing so can be detrimental to your credit score. Here are some ways to manage your funds better and improve your debt repayment strategy.
- Create a household budget and stick to it. It will keep your personal finances on track.
- Set aside some money to pay off your credit card debt timely.
- Limit your credit card purchases and pay the debt in full.
- Cut down on expenses such as a cable TV service, gym membership, or dining out at restaurants.
- Think of an additional source of income that could help you knock off your credit card balance.
- Contact your credit card company in case of a legitimate financial setback. They may reduce the interest rates. Or, offer some leniency with your monthly payments.
- Switch to a no- or lower-interest credit card from a higher-interest card through a balance transfer.
- Consult a credit counselor who will review your financial situation and advise you on how to manage your debt.
If you diligently follow these steps, you’ll be able to pay off your credit card balance in full every month. And, save dollars by avoiding hefty interest amounts.
Read more: Improve your credit score
So, does paying the minimum hurt credit score? It’s fine to make a minimum credit card payment now and then, but it shouldn’t become a habit. Making minimum credit card payments consistently can cost you thousands of dollars in interest in the long run and will extend the period of your debt.
If your total credit card outstanding balance is high and you’re tempted to pay a minimum amount, stop yourself and understand its impact on your credit score.
The amount of debt you have accounted for 30% of your FICO score. And, your credit scoring takes into account individual credit card balances as well as your total credit card balance.
It’s best to pay more than the minimum. It will not only help you save money but will also pay off your credit card debt faster and affect your credit score in a positive manner.